Professional Documents
Culture Documents
By Naveen. Rohatgi
CA.CS.ICWA.MBA
Merger (Amalgamation)
This type of merger involves fusion of two or more companies.
After the amalgamation, the two companies lose their
individual identity and a new company comes into existence. A
new firm that is hitherto, not in existence comes into being.
This form is generally applied to combinations of firms of equal
size.
Example: The merger of Brooke Bond India Ltd., with Lipton
India Ltd., resulted in the formation of a new company Brooke
Bond Lipton India Ltd.
Purchase consideration :
Purchase consideration is the amount which is paid by the
transferee company for the purchase of the business of the
transferor company. In other words consideration for
amalgamation means the aggregate of the shares and other
securities issued and payment in cash or other assets by the
transferee company to the shareholders of the transferor
company.
ASSET ACQUISITION
Asset acquisitions involve buying the assets of another
company. These assets may be tangible assets like a
manufacturing unit or intangible assets like brands. In such
acquisitions, the acquirer company can limit its acquisitions to
those parts of the firm that coincide with the acquirers needs.
Example: The acquisition of the cement division of Tata Steel
by Laffarge of France. Laffarge acquired only the 1.7 million
tonne cement plant and its related assets from Tata Steel.
The asset being purchased may also be intangible in nature.
For example, Coca Cola paid Rs.170 crore to Parle to acquire its
soft drinks brands like Thums Up, Limca, Gold Spot, etc.
Acquistion of brands like Lakme by HLL is an example of asset
acquisition. Corn products India acquired Captain Cook. Smith
line Beecham acquired the crocin brand.
Types of Merger
Horizontal Merger
A horizontal merger involves a merger between two firms
operating and competing in the same kind of business
activity. The main purpose of such mergers is to obtain
economies of scale of production. The economies of scale
is obtained by the elimination of duplication of facilities
and operations and broadening the product line,
reduction in investment in working capital, elimination of
competition in a product, reduction in advertising costs,
increase in market share, exercise of better control on
market, etc.
Horizontal mergers result in decrease in the number of
firms in an industry and hence such type of mergers make
it easier for the industry members to join together for.
monopoly profit
Example:
The merger of Centurion Bank and Bank of Punjab, Oriental
Bank of Commerce and GTB in Banking Sector. A big merger
between Holicim and Gujarat Ambuja Cement Ltd., with
Associated Cement companies is also a merger in the
manufacturing industry. Essar-Hutch and BPLs mobile merger,
VSNLs acquisition of Chennai based Dishnet DSLs Internet
Service Provider (ISP) are some other horizontal mergers that
took place recently.
Vertical Mergers
A vertical merger involves merger between firms that are in
different stages of production or value chain. They are
combination of companies that usually have buyer-seller
relationships. A company involved in a vertical merger usually
seeks to merge with another company or would like to takeover
another company mainly to expand its operations by backward
or forward integration. In vertical combination, the merging
company would be either a supplier or a buyer using its product
as an intermediary material for final production.
Firms integrate vertically between various stages due to reasons
like technological economies, elimination of transaction costs,
improved planning for inventory and production,
reconciliation of divergent interests of parties to a transaction,
etc. Anti-competitive effects have also been observed as both
the motivation and the result of these mergers.
Reverse Merger:
In case of reverse merger, private company may go public by
merging with an already public company that is often inactive.
In India the reverse merger the company opt to take the
advantage of Tax saving (under sec 72 A) so that healthy and
profitable unit is allowed the benefit of set off and carry
forward of losses. Godrej soaps merged with loss making
Gujarat Godrej innovative Chemicals
Reverse merger can also occur on account of regulatory
environment. An example is the reverse merger of ICICI into
ICICI Bank. ICICI could be become the universal bank through
reverse merger with its banking subsidiary.
Leverage Buyout
The acquisition of another company using a significant amount
of borrowed money (bonds or loans) to meet the cost of
acquisition. Often, the assets of the company being acquired
are used as collateral for the loans in addition to the assets of
the acquiring company. The purpose of leveraged buyouts is to
allow companies to make large acquisitions without having to
commit a lot of capital. In an LBO, there is usually a ratio of
90% debt to 10% equity.
White Knight
If a determined hostile bidder thwarts all defenses, a possible
solution is a white knight, a strategic partner that merges with
the target company to add value and increase market
capitalization. Such a merger can not only deter the raider,
but can also benefit shareholders in the short term, if the
terms are favorable, as well as in the long term if the merger
is a good strategic fit.
Green mail
'Poison Pill'
A strategy used by corporations to discourage hostile
takeovers. With a poison pill, the target company attempts to
make its stock less attractive to the acquirer. There are two
types of poison pills:
1. A "flip-in" allows existing shareholders (except the
acquirer) to buy more shares at a discount.
2. A "flip-over" allows stockholders to buy the acquirer's
shares at a discounted price after the merger.
People Pill
This is another defensive strategy adopted to ward off a hostile
takeover. Under this strategy, the management of the target
company threatens the acquirer that in the event of a takeover,
the entire management team will resign. This strategy is a
variation of poison pill defense strategy.
Non-voting Stock
Non-voting stock comprises share that provide the
shareholder with very little or no voting rights on issues such
as election of the board or mergers. Such shares are usually
issued to individuals who want to invest in the companys
profitability and success, but are not interested in voting
rights. Preference shares are typically non-voting shares. such
shares help in making the company a closely held company
and act as a takeover defense.