Muhammed Azharudeen S4, MBA College of Engineering, Trivandrum

Mergers and acquisitions

Mergers and acquisitions (abbreviated M&A) refers

to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture.

Acquisition
An acquisition is the purchase of one business or

company by another company or other business entity.

Private and Public acquisitions. Friendly or Hostile acquisitions.

Consolidation occurs when two companies combine

together to form a new enterprise altogether, and neither of the previous companies survives independently.

Reverse Merger & Reverse Take Over

Reverse Merger A reverse merger occurs when a privately held company (often one that has strong prospects) buys a publicly listed shell company, usually one with no business and limited assets. Reverse Take Over A smaller firm acquiring management control of a larger company and retains the name of the latter for the postacquisition combined entity.

Distinction between mergers and acquisitions

When one company takes over another and clearly

establishes itself as the new owner, the purchase is called an acquisition. Merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated (merger of equals).

Motivations for Mergers and Acquisitions

The primary motive should be the creation of synergy. Synergy value is created from economies of integrating a target and acquiring a company; the amount by which the value of the combined firm exceeds the sum value of the two individual firms.

Synergy is the additional value created (V) :

[1

V VAT -(VA VT )

Where:
V T = the pre-merger value of the target firm VA - T = value of the post merger firm VA = value of the pre-merger acquiring firm

Value Creation Motivations for M&As

Operating Synergies 1. Economies of Scale

Reducing capacity (consolidation in the number of firms in the industry) Spreading fixed costs (increase size of firm so fixed costs per unit are decreased) Geographic synergies (operations to operate on a national or international basis) Combination of two activities reduces costs Combining the different relative strengths of the two firms creates a firm with both strengths that are complementary to one another.

2.
3.

Economies of Scope

Complementary Strengths

Value Creation Motivations for M&A

Efficiency Increases and Financing Synergies

Efficiency Increases

New management team will be more efficient and add more value than what the target now has. The combined firm can make use of unused production/sales/marketing channel capacity Reduced cash flow variability Increase in debt capacity More Working Capital

Financing Synergy

Value Creation Motivations for M&A

Tax Benefits and Strategic Realignments

Tax Benefits

A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. Make better use of tax deductions and credits. Use of deduction in a higher tax bracket to obtain a large tax shield.

Strategic Realignments

Permits new strategies that were not feasible for prior to the acquisition because of the acquisition of new management skills, connections to markets or people, and new products/services.

 Increased revenue or market share:

This assumes that the buyer will be absorbing a major competitor

and thus increase its market power (by capturing increased market share) to set prices.

Resource transfer:
Resources are unevenly distributed across firms (Barney, 1991) and

the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources.

Vertical integration:
Vertical integration occurs when an upstream and downstream firm

merge (or one acquires the other). A merger that creates a vertically integrated firm can be profitable.

Hiring:
Some companies use acquisitions as an alternative to the normal

hiring process. This is especially common when the target is a small private company or is in the start-up phase.

Managerial Motivations for M&As

Managers may have their own motivations to pursue M&As. The two most common, are not necessarily in the best interest of the firm or shareholders, but do address common needs of managers
1.

Increased firm size

Managers are often more highly rewarded financially for building a bigger business (compensation tied to assets under administration for example) Many associate power and prestige with the size of the firm. Managers have an undiversified stake in the business (unlike shareholders who hold a diversified portfolio of investments and dont need the firm to be diversified) and so they tend to dislike risk (volatility of sales and profits) M&As can be used to diversify the company and reduce volatility (risk) that might concern managers.

2.

Reduced firm risk through diversification

Laws Regulating Merger

The Companies Act , 1956 The Competition Act ,2002 Foreign Exchange Management Act,1999 SEBI Take over Code 1994 The Indian Income Tax Act (ITA), 1961 Mandatory permission by the courts Stamp Act

Legal Procedure of Merger

(1) Examination of object clauses:
The object clause of the merging company should permit it to carry on the business of the merged company. If such clauses do not exist, necessary approvals of the share holders, board of directors, and company law board are required.

(2) Intimation to stock exchanges:

The stock exchanges where merging and merged companies are listed should be informed about the merger proposal.

(3) Approval of the draft merger proposal by the

respective boards:

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

(4) Application to high courts:

Once the drafts of merger proposal is approved by the respective boards, each company should make an application to the high court of the state where its registered office is situated so that it can convene the meetings of share holders and creditors for passing the merger proposal.

(5) Dispatch of notice to share holders and creditors:

In order to convene the meetings of share holders and creditors, a notice and an explanatory statement of the meeting, as approved by the high court, 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 news papers.

(6) Holding of meetings of share holders and creditors:

A meeting of share holders should be held by each company for passing the scheme of mergers at least 75% of shareholders who vote either in person or by proxy must approve the scheme of merger. Same applies to creditors also.

(7) Petition to High Court for confirmation and passing of HC

orders: Once the mergers scheme is passed by the share holders and creditors, the companies involved in the merger should present a petition to the HC for confirming the scheme of merger. A notice about the same has to be published in 2 newspapers.

(8) Filing the order with the registrar: Certified true copies of the high court order must be filed with the registrar of companies within the time limit specified by the court. (9) Transfer of assets and liabilities: After the final orders have been passed by both the HCs, all the assets and liabilities of the merged company will have to be transferred to the merging company. (10) Issue of shares and debentures: The merging company, after fulfilling the provisions of the law, should issue shares and debentures of the merging company. The new shares and debentures so issued will then be listed on the stock exchange.

Costs of Merger
The costs of a merger is related to the following factors: Impact of revenue Cost of dealing Cost of integration Cost of transaction (money that is paid for acquiring the company).
This costs can create some short-term problems for the company regarding the cash flow. To handle this crucial part of a merger process, the acquiring companies depend on the experienced professionals of the field.

Thank You