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Merger and Acquisition

By Naveen. Rohatgi
CA.CS.ICWA.MBA

Acquisiont (Absorbtion) : When one company takes over

another and clearly established itself as the new owner, the


purchase is called an acquisition.
Absorption
This type of merger involves fusion of a small company with a
large company. After the merger the smaller company ceases to
exist.
Example: The merger of Bank of Rajasthan with ICICI Bank.
After Merger the Bank of Rajasthan ceases to exist. The merger
of Oriental Bank of Commerce with Global Trust Bank. After
the merger, GTB ceased to exist while the Oriental Bank of
Commerce expanded and continued.

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.

Daimler-Benz and Chrysler ceased to exist when the two firms


merged, and a new company, DaimlerChrysler, was created.

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.

Take over : A take over generally involves acquisition of


certain equity capital which enables the acquirer to
exercise control over the affairs of the company. Example
United breweries acquired majority stake in Deccan
aviation Ltd. Mahindra Telecom takeover of Satyam. Other
example are Indal by Hindalco, IPCL by Reliance
industries, VSNL by Tatas, Balco by Sterlite. In theory the
acquirer must buy more than 50% of the paid up capital of
the acquired company to enjoy complete control. In
practice however effective control can exercised by holding
between 20% to 40%. Since the remaining shareholders
are small and scattered. Takeover can be hostile takeover
or friendly takeover

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.

Friendly takeover: It is a takeover effected with the consent of


the taken over company. In this case there is an agreement
between the managements of the two companies through
negotiations and the takeover bid may be with the consent of
majority shareholders of the target company. It is also known
as negotiated takeover.
Hostile take over: In a hostile take over an outside group
launches a hostile attack to take over the control of the target
company without the concurrence of the existing controlling
group. The buyer buys the shares and therefore control the
target company. The recently consummated Arcelor Mittal

deal is an example of hostile takeover, where the LN Mittal


group acquired management control of Arcelor against the
wishes of the Arcelor management. India Cements takes over
Rassi Cements in 1998.

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.

Examples: Nirmas bid for Gujarat Heavy Chemical (backward


integration) or Hindalco Bidding for Pennar Aluminium
(forward integration). Videocon Groups acquisition of
Thomsons Colour Picture Tube Business in China, RPL and
RIL
Conglomerate mergers
Involve merger between firms engaged in unrelated types of
business activity. Philip Morris a tabacco acquired General
Foods in 1985 for $ 5.6 billion

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.

Advantages of Merger and Acquisition:


Economies of Scale
Consolidation
Gain access to new products and technologies, new markets
Create or gain access to distribution channels
Diversification

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.

Take over Defenses:

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

A company may also pursue the greenmail option by buying


back its recently acquired stock from the putative raider at a
higher price in order to avoid a takeover.
Increasing Debt
Increasing debt as a defensive strategy has been deployed in the
past. By increasing debt significantly, companies hope to deter
raiders concerned about repayment after the acquisition.
However, adding a large debt obligation to a company's balance
sheet can significantly erode stock prices.

Crown Jewel Defense


In business, when a company is threatened with takeover, the
crown jewel defense is a strategy in which the target
company sells off its most attractive assets to a friendly third
party or spin off the valuable assets in a separate entity.
Consequently, the unfriendly bidder is less attracted to the
company assets.

'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.

Voting Plan or Voting Rights Plan


This plan is implemented when the companys constitution
provides for shares that carry superior voting rights compared
to ordinary shares. When an unfriendly bidder acquires a
substantial voting stock, it may still not be able to exercise
control because the stock carrying superior voting rights will
help the company fight the hostile takeover bid. For example,
Asarco had a voting pattern wherein holding 99% of the
companys common stock would give the holders only 16.5%
of the voting power

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.

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