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Meaning, Types Tax aspects of demerger Other types of merger Accounting aspects of merger

MEANING, TYPES
Divestitures result in contraction of assets or

relinquishment of control I. Partial sell-off involves the sale of business division or plant of one company to another II. Demerger involves the transfer of its business divisions of one company to another newly setup co. the company whose business division is transferred is called the Demerged company The company to which the business division is transferred is called the Resultant company

TYPES OF DEMERGER
Spin-off the type of demerger by satisfying these

conditions : 1. The resultant company is a new company 2. The purchase consideration is paid only in the form of shares in the resultant company Split-up is a method of demerger through breaking up of the firm in a series of spin-offs, the parent company no longer exists

Equity carve out:


A parent company sells a portion of its equity in a

wholly owned subsidiary for strategic reasons Importance or benefits of Demerger Sharper focus Improved incentives and accountability Division of a business empire

TAX ASPECTS OF DEMERGER


Following conditions to avail tax benefits are :

All assets and liabilities of demerged co. should become the assets and liabilities of resulting co. at their same book values 2. The shareholders of demerged co. would become the shareholders of resulting co. on proportionate basis 3. The of shareholders of demerged co. become the shareholders of resulting co.
1.

DEMERGER BAJAJ AUTO LTD

BAL demerged into i. BAL (Auto business) ii. BFSL Bajaj Finance Services Ltd (wind energy generation, insurance, consumer finance) iii. BHIL Bajaj Holding & Investment Ltd ( invests in new business opportunities)

OTHER TYPES OF MERGER


Congeneric mergers mergers between entities

engaged in the same general industry and some what inter-related, but having no common customersupplier relationship Use the same sales and distribution channels to reach the customers of both businesses Cash merger 1. the shareholders of one entity receive cash in place of shares in the merged entity 2. Where the shareholders of one of the merging entities do not want to be a part of the merged entity

OTHER TYPES OF MERGER.


Triangular merger:
Often resorted to for regulatory and tax reasons It is a tripartite agreement in which the target co.

merges with a subsidiary of the acquirer A triangular merger may be forward ( when the target co merges into the subsidiary and the subsidiary survives), or Reverse ( when the subsidiary merges into the target co. and the target survives)

CORPORATE RESTRUCTURING -I
OWNERSHIP Mergers & acquisitions Leveraged buyouts Buy-back of shares Spin-offs Joint-ventures Strategic alliances BUSINESS Diversifications Out-sourcing divestment Brand acquisitions ASSETS Lease back of assets Securitization of debt Receivable factoring

CORPORATE RESTRUCTURING - II
ACQUISITIONS
Mergers Purchase of a plant / unit takeovers

DIVESTITURES
Sell offs Demergers Equity carve out

OTHER FORMS
Going private Leveraged buyouts privatization

OTHER FORMS OF RESTRUCTURING


Purchase of a unit/plant:
The acquiring co. acquires the assets and liabilities of

the division and pays cash compensation Going private: Converting a publicly held co. into a private co. Privatization : Transfer of equity shares of public enterprises from government to individuals commanding heights

PRIVATIZATION
Rationale: I. Improvement in efficiency lower agency costs,
II. III. I. II. III. IV.

sharper focus on profitability Generation of resources Promotion of popular capitalism Drawbacks Confusion in objectives Lack of transparency in the sale of PSU Make up of budgetary deficits Lack of political consensus

HOLDING COMPANY
A co. owns the stocks of other co. to exercise control

over them Advantages 1. Control with financial ownership 2. Isolation of risk 3. Enormous financial leverage Disadvantages 1. partial multiple taxation Dividend of subsidiary taxed holding company shareholders pay tax

2.Default of debt subsidiary companies ( not legally binding , reputation is at stake) 3. Magnified risk of debt

LEVERAGED BUYOUT
ACQUIRER- SPV-TARGET
SPV 100% subsidiary Minimum capital

Highly leveraged highly debt company


TATA TEA SPV (TATA Tea) Tetley SPV Tata Tea (Great Britain) Equity 1. Tata Tea $ 15 mn 2. GDR - $ 45 mn 3. Equity by subsidiary of US Tata Tea - $ 10mn

TATA- TETLEY..
$235 mn FIIs Mezzaine Financials
Benefits

Improve the performance of unit II. Reduce business risk III. Cost controls IV. Sell off disposable assets Best LBO 1.Good management team 2.Stable cash flows
I.

ACCOUNTING ASPECT OF AMALGATION


3. Potential for operational improvement 4. Easy to exit Accounting for Amalgamations (AS -14) 1. Amalgamation in the nature of merger 2. Amalgamation in the nature of purchase Amalgamation in the nature of merger (conditions) 1. All assets and liabilities of the transferor company before amalgamation should become the assets and liabilities of the transferee company

ACCOUNTING..
2. Not less than 90% of the face value of the equity

shareholders of the transferor company should become the shareholder of transferor company 3. Payment of purchase consideration in the form of equity shares only 4. The business of the transferor company is carried on by the transferee company 5. Book value of assets & liabilities of transferor company as the same in books of transferee company

ACCOUNTING.
Any of the conditions not satisfied amalgamation in

the nature of acquisition Accounting treatment for merger pooling of interest method Accounting treatment of acquisition purchase method Pooling of interest method 1. Aggregating of book values of assets and liabilities of both the companies 2. The adjustment of swap ratio is done in the reserves

POOLING OF INTEREST METHOD FEATURES


1.
2. 3. 4.

5.

The same value of assets, liabilities and reserves of the transferor co. are recorded by the transferee co. Purchase consideration is valued at the par value of the shares issued Effect of changes in accounting policies as per AS-14 Balance of P&L A/c of both transferor and transferee company need to be aggregated The identity of the reserves is preserved transferors books

FEATURES.
6. The difference between the amount recorded as purchase consideration and the share capital of transferor co. should be adjusted in the reserves

ACCOUNTING.
Amalgamation in nature of acquisition/purchase

The assets and liabilities are transferred at fair market values II. The excess of the purchase consideration over the net book values of assets and liabilities is treated as goodwill III. The deficit of purchase consideration over the net book value of assets and liabilities is treated as capital reserve
I.

PURCHASE METHOD (ACQUISITION)


Assets and liabilities are entered at existing carrying amounts OR 2. Purchase consideration should be allocated to individual identifiable assets and liabilities on the basis of fair value at the date of amalgamation 3. Purchase consideration is valued at the market price of the shares issued by the transferee company 4. All statutory reserves should appear in transferee companys balance sheet
1.

PURCHASE METHOD .
5. Amalgamation Adjustment A/c

Dr. .

To Statutory Reserves A/c .. 6. Statutory reserves Liabilities side 7. Amalgamation Adjustment Assets side 8. Good will amortized over 5 years / useful life

POOLING OF INTEREST METHOD Vs PURCHASE METHOD


POOLING OF INTEREST
Purchase consideration

PURCHASE METHOD
Purchase consideration

basis at par value of shares


Assets & liabilities at book

value in the transferee companys books Reserves of transferor company appear( as adjusted with difference between share capital and p.c ) in transferee companys books

basis of market value of shares Assets & liabilities at fair value in the transferee companys books Only statutory reserves of transferor company appear in the books of transferee company ( Dr. amalgamation adj a/c , Cr. Statutory reserve)

Pooling of Interest
No good will or capital

Purchase method
Goodwill or capital reserve

reserve appears in transferee companys books

appears in transferee companys books - G.W when P.C> Net assets - Capital Reserve when P.C< Net assets

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