Mergers & Acquisitions Complete explanation1).ppt

Mergers & Acquisitions
Semester III
Notes by Prof

M&A – Course outline

•Introduction to the concepts : 4 sessions
•Merger : Amalgamation
•Acquisition : Take over
•Demerger
•Leveraged buy out
•Types of M&A : Characteristic Features
•Theories of M &A
•Merger Motives

M&A Course Outline
•M & A as management Strategy : 3
sessions
•Understanding Strategy
•Various Schools of Strategy
•Examining relevance of M&A as strategy
•Case Study of Nicholus Piramal
•Case Study of Cisco Systems

Course Outline
•Due Diligence :
•outlining the steps involved in executing
M& A strategy -1 session
•Defence Mechanism : Case study of
Arcelor Mittal
•Valuation : Valuing Target Company / its
shares : Methods - 4 sessions

Course Outline
•Legal Compliances : 3 Sessions
•SEBI Take over Code
•Companies Act
•Competition Act
•Income Tax Act
•Stamp Duty
•Foreign Exchange Management Act
•Sick Inds. Companies Act / BIFR

Course Outline
•Divestitures / Demergers and Reverse Mergers
: 1 session
•Post Merger Integration: 4 Sessions
•Case Studies 4 Sessions
•Total 24 sessions
•Evaluation Pattern :
•Final Examination : 60 marks
•M&A News Analysis 10 marks
•Take over Targets 10 marks
•M&A Case study 20 marks

M&A – Overview : Top ten deals
of FY 2011
Date Acquirer Target Value $ mSector Geograp
hy
Aug10Vedanta
Resources Plc
Cairns
India Ltd
9,487 Oil &GasInbound
Feb 11BP Plc Reliance
Inds 23
blocks of
oil & Gas
7,200 Oil & GasInbound
Mar 11Vodafone Hutchison
Essar Ltd
5,000 Telecom Inbound
May10Abbott Lab Piramal
Healthcare
3,713 Pharma Inbound
Aug 10Adani
Enterprises
Linc
Energy Ltd
2,740 Mining outbound
Apr 10Reliance IndsAtlas
Enegy Plc
Marcells
1,700 Oil &GasOutbound

M& A overview
Date Acquirer Target Value $ M.Sector Geograph
y
May 10Hinduja GroupKBL
European
Pvt
Bankers
1,664 Fin.ServiceOutbound
July10Reliance
Power
Reliance
Natural
Resources
1,529 Oil & GasDomestic
Jan 11iGate Corp Patni
Computer
1,220 IT Inbound
Jun 10Reliance IndsPioneer
Natural
Resources
1,145 Oil &Gas Outbound
Source Thomson ONE Banker & Earnst &
Young

M&A - Overview
• April -March
• 2011 2010
•Total no of deals 1131 1385
•Deal Value us$ billion 62 39
•Significant value increase of 60%
•Source : Thomson ONE Banker & E&Y

M&A - Overview
•If we break up these figures into
geographic movements : Deal Count
•Fin. Years 07 08 09 10 11
•Outbound 227 310 234 176 247
•Inbound 356 412 419 308 305
•Domestic 803 701 712 901 579
•Total 1386 1423 1265 1385 1131

M&A -Overview
•Value wise break up of deals is as under
(In US $ billions:)
•Fin. Years 07 08 09 10 11
•Outbound 27.2 18.7 8.8 19.7 16.6
•Inbound 27.7 15.9 17.3 8.2 35.9
•Domestic 11.2 13.4 10.0 11.0 9.7
•Total 66.1 47.9 16.1 38.8 62.2

M&A Concepts
•Merger:
•Merger is defined as the combination of
two or more companies into a single
company where one survives and the other
loses its corporate existence. The survivor
acquires the assets as well as liabilities of
the merged company or companies.
Example : Merger of TOMCO with HLL

M&A Concepts
¨ Amalgamation:
•Section 2 (a) of Income Tax Act defines: Amalgamation in relation to
companies means the merger of two or more companies to form one
company in such a manner that:
•All the properties of the amalgamating company or companies just before
the amalgamation become the properties of amalgamated company by
virtue of amalgamation.
•All the liabilities of the amalgamating company or companies just before the
amalgamation become the liabilities of the amalgamation; become the
liabilities of the amalgamated company by virtue of amalgamation.
•Shareholders holding not less than three-fourth in value of shares in the
amalgamating company or companies becomes the shareholders of the
amalgamated company by virtue of amalgamation.
•The term amalgamation and merger are synonymous / Interchangeable

M&A Concepts
•Consolidation:
•Technically speaking consolidation is the fusion of two
existing companies into a new company in which both
the existing companies extinguish. The small difference
between consolidation and merger is that in merger one
of the two or more merging companies retains its identity
while in consolidation all the consolidating companies
extinguish and an entirely new company is born.
•Example Birla Nuvo : Consolidation of Birla
Fertiliser, Birla Rayon and Birla Finance

M&A Concepts
•Acquisitions / Takeovers:
•This refers to purchase of majority stake
(controlling interest) in the share capital of an
existing company by another company. It may be
noted that in the case of takeover although there
is change in management, both the companies
retain their separate legal identity.
•Takeover of Ranabaxy by Daichi
•Terms Takeover & Acquisition are used
interchangeably

M&A Concepts
•Sell Off :
•General Term for divestiture / demerger of part or
whole of the firm by any one or number of means:
• i.e. sale, spin off, split up etc.
•Spin Off:
•A transaction in which a company distributes all
the shares it owns in a subsidiary to its own
shareholders on pro-rata basis & then creates a
new company with the same proportional
shareholding pattern as in the parent company .

M&A Concepts
•Spin off : occurs when a subsidiary
becomes an independent entity. The
parent firm distributes the shares of its
subsidiary to its shareholders. Each
shareholder receives shares in the new
company proportionate to his or her
ownership in the parent. The subsidiary
company becomes a separate legal entity
with distinct management and board.

M&A - Concepts
•Spin off : Example Cement division of L&T
was spun off into Ultratech Ltd which was
later on taken over by Grasim.

M&A Concepts
•Split Off :
•A transaction in which some, but not all, shareholders of
the parent company receive shares in a subsidiary, for
relinquishing their parent company shares.
•A split off differs from spin off : Shareholders in split
off must relinquish their shares of stock In parent
company, in order to receive shares of subsidiary, where
as shareholders in spin off need not do so.

M&A - Concepts
•Split Up :
•A transaction in which a company spins off, all of
its subsidiaries to it shareholders and ceases to
exist.
•The parent company distributes all stock of each
subsidiary to existing shareholders in exchange
for all outstanding parent company stock and
liquidates itself.
•In other words, a single company splits into two
or more separately run companies.

M&A - Concepts
•Split up : Classic example is that of split up
of AT&T into four separate units : AT&T
Wireless, AT&T Consumer, AT&T Broad
band and AT&T Business.
•Indian example : Split up of Zee Business

M&A - cONCEPTS
•Equity Carve Out :
•A transaction in which a parent company
offers some common stock of one of its
subsidiaries to the general public, so as to
bring in a cash infusion to the parent
company without losing the control.

M&A - Concepts
•The equity carve out differs from spin off in
two aspects :
•In spin off distribution is made pro rata to the
shareholders of the parent firm as
dividend/bonus – a form of non cash
payment to shareholders.
•In equity carve out, the stock of subsidiary is
sold in capital market for cash which is
received by the parent.

M&A Concepts
•In spin off , parent firm no longer has
control subsidiary assets.
•In a carve out, parent company, generally
sells minority interest in the subsidiary and
maintains control over subsidiary’s assets
and operations.

M&A - Concepts
• De-merger:
•De-merger essentially means bonafide
separation of the key business assets and
reorganizing the business in such a
manner that though there is separation in
favour of another company, at least 75%
of the equity stake in two companies
continues to be common.

M&A Concepts
•Section 2 (19AA) was introduced by Finance Act of
1999 defining De-Merger:
•De-merger means transfer in pursuance scheme of
arrangement under section 391 to 394 of the
companies Act by de-merged company of its one or
more undertakings to any resultant company
•In such a manner that:
•All the property relatable to the undertaking of
demerged company immediately before demerger
becomes the property of resultant company.
•All liabilities relatable to the undertaking immediately
before demerger, becomes the liability of resultant
company.

M&A Concepts
•Demerger :
•Transfer of properties and liabilities is at book values.
•The resultant company issues its shares to the
shareholders of demerged company in consideration
of demerger on proportionate basis.
•Shareholders of not less than 75% of the value of
shares of demerged company become the
shareholders of resultant company.
•Transfer of undertaking is on a going concern basis
•De merger is in accordance with the conditions if any,
notified by Central Government under Section 72 A(5).

M&A - Concepts
•Slump Sale: Section 2 (42c) Income Tax
Act:
•Means transfer of undertaking or unit or
division or business activity as a whole for
lump sum consideration without values
being assigned to individual assets and
liabilities. Profits or gains arising from
slump sale shall be chargeable as long
term capital gain.

M&A Concepts
•TYPES OF MERGERS & ACQUISITIONS:
•Mergers & Acquisition can be classified into
three categories:
•On the basis of movement in the industry.
•On the basis of method or approach
•On the basis of response / reaction
•On the basis of geography : Inbound / Outbound
/Domestic

M&A Concepts
•On the basis of movement in the
industries:
•Horizontal
•Vertical
•Forward integration
•Backward integration
•Conglomerate

M&A Concepts
•On the basis of method or approach:
•Leveraged buyouts
•Management buyouts
•Takeover by worker

M&A Concepts
•On the basis of response / reaction:
•Friendly Takeovers
•Hostile Takeovers
•On the Basis of geographical
movement:
•Inbound
•Outbound
•Domestic

M&A Concepts
Horizontal Mergers:
•Horizontal merger involves merger of two firms
operating and competing in the same line of
business activity. It is performed with a view to
form a larger firm, which may have economies of
scale in production by eliminating duplication of
competition, increase in market segments and
exercise of better control over the market. It also
helps firms in industries like pharmaceuticals,
automobiles where huge amount is spent on
R&D to achieve a critical mass and reduce unit
development costs

M&A Concepts
•Horizontal merger tend to be regulated by
the Govt. in view of their potential for
creating monopoly power and negative
effect on competition.
•Example: India cements acquiring Raasi
Cement , Nicholus Piramal, Cisco systems

M&A Concepts
•Vertical Mergers :
•Vertical Mergers take place between two or
more firms engaged in different stages of
production. The main reason for vertical merger
is to ensure ready take off of the materials, gain
control over scarce raw materials, gain control
over product specifications, increase in
profitability by eliminating the margins of the
previous supplier/ distributor and in some cases
to avoid sales tax.
•Example: Tea Estate Ltd merging with Brooke
Bond Ltd.

M&A Concepts
•Vertical Mergers in turn may be
•Forward
•Backward
•Forward Integration :
•If the movement is towards finished goods,
it is forward integration for example fabric
manufacturing unit acquires apparel
manufacturing unit.

M&A Concepts
•Backward Integration :
•Movement of the company is to acquire
company manufacturing its raw material,
it is backwards integration.
•For example, Apparel manufacturing unit
acquires fabric manufacturing company

M&A Concepts
•Conglomerate Mergers:
•Conglomerate merger refers to the
merger of two or more firms engaged in
unrelated line of business activity.
•For example Birla Nuvo
•It is a conglomerate merger of Birla
Rayon, Indo Gulf Fertilisers and Birla
Finance

M&A Concepts
•Two important characteristics of
conglomerate mergers are:
•A conglomerate firm controls a range of activities
in various industries that require different skills in
the specific managerial functions of research,
applied engineering, production and marketing.
•The diversification is achieved mainly by
external acquisitions and mergers and not by
internal development

M&A Concepts
• Among conglomerate mergers three types
may be distinguished:
•A product extension merger broadens the
product line of firm.
•A geographic market extension merger involves
firms whose operations are conducted in non
overlapping geographic areas.
•Other conglomerate mergers involving unrelated
business and do not qualify for product
extension or geographic extension.
•Example: GNFC acquiring Gujarat Scooters.

M & A Concepts
•Conglomerate mergers can be further classified
as Financial Conglomerates & Managerial
Conglomerates:
•Financial Conglomerates:
•Financial Conglomerates provide a flow of funds
to each segment of the operations, exercise
controls and are the ultimate risk takers. In
theory, financial conglomerates undertake
strategic planning but do not participate in
operating decisions

M&A Concepts
•Managerial Conglomerates:
•Managerial conglomerates not only assume financial
responsibility but also play a role in Operating decisions
and provide staff expertise and staff service to the
operating entities. By providing managerial counsel and
interactions on decisions, the managerial conglomerates
increase the potential for improving performance. When
any two firms of unequal management competence are
combined the performance of combined firm will benefit
from the impact of the superior management and total
performance of combined firm will be greater that the
sum of individual parts. This defines synergy in most
general form.

M&A Concepts
•Concentric Companies
•The difference between managerial conglomerates and
the concentric company is based on the distinction
between the general and specific management
functions.
•If the activities of the segments brought together are so
correlated that there is carry over of specific
management functions (research, manufacturing,
finance, marketing, personnel and so on) or
complementarily in relative strengths among these
specific management functions, the merger should be
called concentric rather than conglomerate

M&A Concepts
•The concentric merger is also called product
extension merger. In such a merger, in addition
to transfer of general management skills, there
is transfer of specific management skills, as in
production, research, marketing etc. which have
been neither used in different line of business. A
concentric merger brings all the advantages of
conglomeration without the side effects i.e, with
concentric merger, it is possible to reduce the
risk by not venturing into areas that the
management is not competent in .

M&A Concepts
•Consolidation Mergers:
•Consolidation merger involves a merger of a subsidiary
company with parent company. The reasons behind
such mergers are to stabilize cash flows and to make
funds available for the subsidiary. In consolidation
mergers, economic gains are not readily apparent as
merging firms are under the same management. Still,
Flow of funds between parent and the subsidiary is
obstructed by other consideration of laws such as
taxation laws, Companies Act etc. Therefore,
consolidation can make it easier for to infuse funds for
revival of subsidiaries

M&A Drivers/ Motives
•MERGER MOTIVES:
•The merger motives are as follows:
•Growth Advantage / Combination Benefits:
•The companies would always like to grow and best way to grow
without much loss of time and resources is to inorganically by
acquisition and mergers.
• E.g.:Merger of
•SCICI with ICICI
•ITC Classic with ICICI
•Acquisition of
•Raasi cement by India cement
•Dharani Cement and Digvijay cement by Grasim
•Modi cement by Gujarat Ambuja

M&A Drivers/ Motives
•Diversification:
•The companies could diversify into
different product lines by acquiring
companies with diverse products. The
purpose is to diversify business risk by
avoiding to put all eggs into one basket.
•E.g.: All Multi-product

M&A Drivers/ Motives
•Synergy:
•When the companies combine their operations
and realize results greater in value than mere
additions of their assets, the synergy is said to
have been resulted.
•Combined efforts produce better results on
account of Rationalization of operating assets of
merged companies.
•Sharing of sales outlets / distribution channels.
• Cost reduction / savings.

M&A Drivers /Motives
•Market Dominance / Market Share/ Beat Competition:
•The predominant market share or market dominance has
always driven the executives to look for acquiring
competitive companies and create a huge market
empire.
• E.g.: Acquisition of Tomco by Hindustan Lever
•Computer Associates International - Acquired around
twenty software companies.
•Consolidation in cement industry
•Nicholas Piramal Ltd. has merged into itself Rone
Polanc, Sumitra Pharma, Roche Products

M&A Drivers/ Motives
•Technological Considerations:
•It refers to enhancing production
capacities to derive economies of scale or
capabilities of manufacturing superior
quality products.
•E.g.:Acquisition of Corus by Tata.
•Acquisition of Jaguar and Land Rover
brands by Tata from Ford .

M&A Drivers / Motives
•Asset Tripping:
•When the companies are acquired for the
hidden assets which are owned and these
assets can be separately developed or
even sold off for profit.
•E.g.:Textiles companies being taken over
for the surplus land which could be
developed for real estate / malls

M&A Drivers / Motives
•Taxation Benefits / Revival Of Sick
Units:
•Section 72 A of Income Tax Act provides
for revival of sick units by allowing
accumulated losses of the sick unit to be
absorbed by the healthy units subject to
compliances to the conditions of the
provision.

M&A Drivers / Motives
•Acquiring Platform:
•When a company would like to expand
beyond geographical limits and acquire
platform in the new place the best way
would be to acquire the companies.
•E.g.:Acquisition of Parle by Coke.
• All cross border takeovers are
basically to enter new place/ markets.

M&A Drivers/ Motives
•Ansoff, Brandenburg, Partner & Radosevich
have given list of 13 motives as under :
•1. A desire to limit competition and achieve
monopoly benefits
•2.A desire to utilise unutilised market power
•3.A response to shrinking opportunities for
growth / profit in one’s own industry due to
shrinking demand or excessive competition

M&A Drivers/ motives
•4.A desire to diversify to reduce the risk of
business
•5.A desire to achieve a large enough size
to realise an economical scale of
production or distribution
•6.A desire to overcome critical problems in one’s
own company by acquiring necessary
complementary resources, patents or factors of
production / distribution

M&A Drivers/ Motives
•7.A desire to achieve sufficient size to
have efficient access to capital markets.
•8.A desire to utilise more fully particular
resources or personnel controlled by the
firm with particular applicability to
managerial skill.
•9.A desire to displace an existing
management

M&A Drivers/ Motives
•10.A desire to utilise tax loopholes not available
without merging.
•11.A desire to realise the promotional or
speculative gains attendant upon new security
issues or changed price earnings ratios
•12.A desire of managers to create image of
themselves as aggressive mangers
•13.A desire of managers to manage an ever
growing set of subordinates

M&A Drivers/ motives
•Relevance of Managerial goals to M&A :
•Walter and Barney have divided 20
managerial goals into five clusters so as to
highlight their relevance to M&A :
•I Mergers are a way managers obtain
and exploit economies of scale :
•1. Utilise the acquiring company’s
expertise in production, marketing or other
areas within the acquired company

M&A Drivers/ Motives
•2. Create economies of scale by related capacity
expansion
•3. Utilise the acquired company’s personnel, skill,
or technology in other operations of the acquiring
company.
•II .Mergers are a way managers deal with
critical and ongoing interdependencies with
others in firm’s environment :
•4.Accelerate growth or reduce risks and costs in
industry where acquiring co has a strength.

M&A Drivers/ Motives
•5.Utilise interlocking and mutually
stimulating (Synergistic) qualities of the
acquired company vis a vis the acquiring
company.
•6.Improve efficiencies and reduce risk in
the supply of specific goods and / services
to the acquiring company

M&A Drivers/ Motives
•III. Mergers are a way managers expand
current product lines and markets :
•7.Attain improved competitiveness inherent in
holding sizable market share or important market
position
•8.Reduce the risk of diversifying products and
services delivered to customers within the
industry
•9. Penetrate new market by utilising the acquired
company’s market capabilities.

M&A Drivers/ Motives
•10.Improve economies of scale by utilising
the acquired company’s distributional capabilities
to absorb expanded output.
•11. Broaden the customer base for existing goods and
services of the acquiring company.
•12.Expand capacity at less cost than assembling new
facilities, equipment

and/ or physical assets.

M&A Drivers / Motives
•IV. Mergers are a way managers enter new
business :
•13. Gain valuable or potentially valuable assets
with the cash flow or other financial strengths of
the acquiring firm.
•14.Reduce risk and costs of entering new
industry
•15.Fulfill the personal ambitions, vision or some
particular goal of the acquiring company’s
chief executive.

M&A Drivers /Motives
•V. Mergers are a way managers maximize
and utilize financial capacity :
•16. Promote visibility with investors, bankers, or
governments with an eye to subtle benefits later
• 17. Utilize financial strengths of the acquired
company such as foreign tax credits or
borrowing capacity
• 18. Gain complementary financial features such
as those that balance earning cyclicality

M&A Drivers/ Motives
•19. Divest poor-performing elements of
the otherwise undervalued acquired
company, in portfolio management style
• 20. Pursue opportunities to sell stock at a
profit by such acts as pressing
management of the acquired firm for
improved

M&A Drivers / Motives
Change forces and motivation for M&A
1. Technological changeBroadcasting, Internet,
Telecommunications,
computers / software
2.Globalisation Apparels, Textiles, Financial
Services, Metals and Mining
3 Commoditisation Chemicals, Pharmaceuticals
4.Low growth Food Processing, Toiletries
and Cosmetics
5.Cronic Excess Capacity
leading to consolidations
Automobiles, Integrated
Steel

Change Forces and M&A
Motivations
6.Fragmentation Staffing Services, Rental
Equipments ,Facility
Services
7.Large capital requirements
subject to high risk
Pharmaceuticals
8.Price Volatility Coal, Uranium, oil field
services, Petroleum
producing
9.Deregulation Air Transport, Entertainment,
Broad casting , Fin. Services
10.Augmented CapabilitiesPharmaceuticals, Computers
And software

M&A - Theories
•Theories provide an explanation to any phenomenon,
pattern and provide basis for further action plan. The
phenomenon of merger and acquisitions has been
explained by different theories as under:
• I Efficiency Theories
•Differential Managerial Efficiency
•Inefficient Management
•Operating Synergy
•Pure diversification
•Strategic Realignment to changing environments
•Under Valuation

M&A Theories
•II. Information and Signaling
•III. Agency Problems and managerialism
•IV. Free Cash flow hypothesis
•V. Market Power

M&A Theories
•Efficiency Theories
•a) Differential Efficiency:
•If the management of firm A is more
efficient than the management of firm B
and if after firm A acquires firm B, the
efficiency of firm B is brought up to the
level of efficiency of firm A, efficiency is
increased by merger.

M&A Theories
•Features:
•There would be social gain as well as
private gain.
•This may also be called managerial
synergy hypothesis.

M&A Theories
•Limitations:
•If carried to its logical extreme, it would result in
only one firm in the economy, the firm with
greatest managerial efficiency.
•Over-optimization on the part of efficient firm
about its impact on acquired firm may result in
excess payment of consideration or failure to
improve its performance.
•Inefficient / under performing firms could
improve performance by employing additional
managerial input through direct employment /
contracting

M&A Theories
b) Inefficient Management:
•Inefficient Management refers to non
performance up to its potential level. It may be
managed by another group more efficiently.
•Features:
•Inefficient Management represents management
which is inept in absolute sense.
•Differential management theory is more likely to
be basis for horizontal merger; inefficient
management theory could be basis for mergers
between firms of unrelated business

M&A Theories
•Limitations:
•Difficult to differentiate differential management
theory from inefficient theory.
•The theory suggests replacement of inefficient
management. However empirical evidence does
not support this.
•The theory also suggests that acquired firms are
unable to replace their own managers and thus
it is necessary to invoke costly merger to replace
inefficient managers- This is not convincing

•C ) Operating Synergy:
•Operating synergy or operating economies may be
achieved in horizontal, vertical and even conglomerate
mergers.
•Features:
•Theory is based on the assumption that economies of
scale do exist in this industry and prior to merger, firms
are operating at the levels of activity that fall short of
achieving the potential for economies of scale.
•Economies of scale arise because of indivisibilities such
as people, equipment overhead which provide increasing
returns if spread over a large number of units of output

•d) Pure Diversification:
•Diversification of the firm can provide the
managers and employees with job security
and opportunity for promotion and other
things being equal, results in lower costs.
Even for owner manager diversification is
valuable as risk premium for undiversified
firm is higher

M&A Theories
•Diversification has value for many reasons:
•Demand for diversification by managers, other
employees
•Preservation of organizational and reputation
capital
•Financial and tax advantages
•Diversification helps preserving reputation
capital of the firm, which will be lost if firm is
liquidated

M&A Theories
•Diversification can be achieved through
internal growth as well as mergers.
However mergers may be preferred in
certain circumstances:
•Mergers can provide quick diversification.
•Firm may lack internal growth opportunity
for lack of requisite resources or due to
potential excess capacity in industry.

M&A Theories
•e) Strategic Realignment to Changing
Environment:
•Strategic planning is concerned with firm's
environment and constituencies, not just
operating decisions. The speed of
adjustment through merger would be
quicker than internal development

M&A Theories
•Features:
•Strategic planning approach to mergers implies either
the possibilities of economies of scale or tapping an
underused capacity in the firms present managerial
capabilities.
•By external diversification the firm acquires management
skills for augmentation of its present capabilities.
•A competitive market for acquisitions implies that the net
present value from merger and acquisition investment is
likely to be small. Nonetheless if synergy can be used as
a base for still additional investments with positive net
present values, the strategy may succeed.

M&A Theories
•f ) Under Valuation:
• Some studies have attributed merger motives to under valuation of
target companies.
•One cause of under valuation may be that management is not
operating the company up to its potential (aspect of inefficient
management theory.)
•Second possibility is that acquirer has an inside information. Hence,
its bidder possesses information which general market does not
have, they may place higher value on the shares than currently
prevailing in the market.
•Another aspect of under valuation theory is the difference between
the market value of assets and their replacement costs. Hence entry
into new product market areas could be accomplished on a bargain
basis

M&A Theories
•II Information and Signaling:
• Shares of the target company in a
tender offer experiences upward
revaluation even if offer turns out to be
unsuccessful. New information is
generated as a result of tender offer
and the revaluation is permanent.

M&A Theories
•Two forms of information:
•The tender offer disseminates the
information that the target shares are
undervalued and offer prompts the
market to revalue the shares.
•Offer inspires the target firm
management to implement a more
efficient business strategy on its own.

M&A Theories
• Signaling may be involved in number of ways:
•Tender offer gives a signal to the market that hither to
unrecognized extra values are possessed by the firm or
•Future cash flow streams are likely to rise.
•When a bidder firm uses common stock on buying
another firm, it is taken as a signal that common stock of
bidder firm is overvalued.
•When buyer firm repurchases their shares, the market
may take this as signal that the management has
information that its shares are undervalued and
favorable new opportunities will be achieved.

M&A Theories
•Iii. Agency problems and Managerialism :
•Agency problem arises when a manager
owns a fraction of ownership shares of the
firm. This partial ownership may cause
managers to work less vigorously than other
wise and / or consume more perquisites,
(luxurious offices, company cars,
membership of clubs) because majority
owners bear most of the cost.

M&A Theories
• Agency costs include:
• Cost of structuring a set of contracts
• Cost of monitoring and controlling the behavior of
agents by principals.
• Cost of bonding to guarantee that agents will make
optimal decisions or principles will be compensated
for consequences of sub-optimal decisions.
• Residual loss: i.e. welfare loss experienced, by the
principals arising from the divergence between
agent’s decisions and decisions to maximize
principal’s warfare. This residual loss can arise
because the cost of full enforcement of contracts
exceeds the benefits.

M&A Theories
•Takeover as solution to Agency Problems:
–Agency problems can be controlled by organizational
or market mechanism:
–A number of compensation arrangements and market
for managers may mitigate agency problems.
–Stock market gives rise to external monitoring device,
because stock prices summaries the implications of
decisions made by managers. Low stock prices exert
pressure on managers to change their behavior and
to stay in line with interest of shareholders.

M&A Theories
–When these mechanisms are not sufficient,
market for takeover provides an external
control device of last resort.
–A takeover through a tender offer or proxy
fight enables outside managers to gain control
of decision process of Target Company, while
circumventing the existing managers and
Board of Directors.

M&A Theories
•Managerialism
•In contrast to the view that mergers occur to
control agency problem, some observers
consider merger as manifestation of agency
problems rather than the solution.
•Mueller emphasizes that managers are
motivated to increase the size of the firm as
compensation to manager is function of the size
of the firm.
•But empirical evidence shows that compensation
is correlated with profit rate and not with level of
sales.

M&A Theories
•Iv Free Cash flow hypothesis
•Jenson argues that pay out of free cash flow
can play an important role in dealing with
conflict between managers and shareholders.
•Payout of free cash flow reduces the amount
under control of managers and reduces their
power. Further they are subject to monitoring
in capital market when they seek to finance
additional investment with new capital.
•He states that such a free cash flow must be
paid out to shareholders if firm is to be
efficient and to maximize share price.

M&A Theories
•Managers arrange cash flows also by
issuing debts / leveraging.
•In leveraged buyouts, increased debt
increases risk of bankruptcy cost in
addition and agency costs.
•Optimum debt / Equity Ratio will be where
the marginal cost of debt equals marginal
benefit of debt.

M&A Theories
•Hubris Hypothesis
•Roll hypothesis - that managers commit
errors of over-optimism in evaluating
merger opportunities due to excessive
pride, animal spirit or hubris.

M&A Theories
•In a takeover, bidding firm identifies potential target firm
and values its assets.
•When valuation turns out to be below market price of the
stock, no offer is made.
•Only when valuation of stock exceeds its market price ,
Bid is made.
•Valuation at Current market price:
•If there are no synergies or other takeover gains, it would
mean valuation will be at current market price. No offer
would be made.
•Offers are made only when valuation is too high.
•Takeover premium is random error, a mistake made by
the raider.

M&A Theories
•V. Market Power
•Mergers increase a firm’s market share. It is
argued that larger volume of operations through
Mergers and Acquisitions result in economies of
scale.
•But it is not clear whether the price required by
the selling firm will really make acquisition route
more economical method of expanding a firm's
capacity either horizontally or vertically.

M&A Theories
•An objection often raised against
permitting a firm to increase its market
share by merger is that it will result into
"undue concentration" in the industry.
•Public policy of USA holds that when four
or fewer firms amount for 40% or more of
the sales in given market or line of
business, an undesirable market structure
or undue concentration exists.

M&A Theories
•VI. Tax consideration
•Section 72 A of Income Tax
•Revival of Sick Units under SICA
•Reverse mergers.

M&A Theories
•VII. Value increase by Redistribution
•Value increases under merger on account
of redistribution among the stake holders
of the firm. Shifts are from the Bond
holders to stock holders and from labor to
stock holders and / or consumers.

M&A Theories
•Other Theories : Capital Structure Theory:
•This theory suggests that under reasonable
conditions, changes in capital structure may
affect the value of shares, if everything else
remains unchanged by the merger.
•Mergers which increase debt equity ratio of a
firm would give more value to the firm than if it
was financed through sale of equity.

M&A Theories
•Lewellen (1971) has argued that conglomerate
mergers are profitable because the debt
capacity of the merged firm exceeds the sum of
debt capacity of the individual firms involved in
the merger.
•Low debt equity ratio or low interest expense to
earnings ratio indicates the ability to service
more debt. Value is created because firms
pursue profitable but unfunded investment
opportunities.

M&A Theories
•Distress Sales or Bankruptcy avoidance
theory :
•The managers of financially distressed
companies may actively seek a merger
partner rather than slide into liquidation
proceedings and thereby avoid bankruptcy
costs, protect the value of their equity
stakes and additionally allow acquiring
company to utilise tax carry forwards.

M&A Theories
•Merger contingency Framework
•This framework has been adapted from the
diversification contingency framework. The theory
suggests that whether a buyer firm gains or loses from a
merger is contingent upon the firm’s competitive
strengths, growth rates of its markets and the degree to
which these two factors achieve a logical or strategic fit
with competitive strengths. Better the strategic fit ,
greater will be the potential value created by merger.

M&A Theories
•Asymmetric Theory :
•This theory explains how any incremental value
associated with a particular merger is shared between
the buying and selling firms.
•Assuming that the buying firm is managed by rational
decision makers who pursue mergers as a means to
improve the wealth position of their firm’s stakeholders,
the asymmetric theory predicts that a competitive
hierarchy is developed by the price that each firm is
willing to pay for the seller firm.

M&A Theories
•The price is approximated, in each case ,
by discounted value of the expected post
merger earnings and it is predicted to be a
positive function of the strategic fit between
the two firms.
•As a general rule, the best fit buying firm
will pay at least marginally above the
highest price offered by second best fit firm.

M&A Theories
•The value of best fit firm will, therefore, increase
by approximately the difference between
incremental value associated with its fit with
seller firm and the incremental value associated
with its fit with the fit of second best fit acquiring
firm.
•A key assumption underlying both merger
contingency theory and asymmetric theory is
that value added is a function of relatedness.

M&A As Strategy

Strategies for Growth
•Internal Projects: Investment Projects for
expansion developed within the firm.
•Minority Investments : A small fraction,
usually less than 5% of the equity of the
target company is acquired. This gives the
acquiring firm increased knowledge of the
activities of the target company’s
business.

Strategies for Growth
•Licensing : Production techniques/ technology given
under contractual undertaking for consideration / rent.
•Alliance : Business relationship of co operation and co
ordination with a particular purpose or specific area of
activities.
•Joint Ventures : A combination of subsets of assets or
investment contributed by two or more business entities
for specific business purpose and a limited duration.
Each of the venture partners continues to exist as a
separate firm and the joint venture represents a new
business enterprise.
•Acquisitions
•Mergers

Relative strength of alternative
strategy
BenefitsInt. Invest LicensingAllianceJt.Ventur
e
M&A
Learn new
areas
Low Low High High High High
Combine
best
Practices
Low Low Medium Medium High High
Increase
demand
for
products
Low Low Low Medium High High
Add
capabilitie
s
Mediu
m
Low Low Medium High High
Add
Products
Low Low Low Medium Medium High

Relative Strength of Alternative
strategies
BenefitsInt. Invest LicensingAllianceJt.Ventur
e
M&A
Add
Markets
Low Low High Medium Medium High
Speed High Medium High Medium Midium Medium
Costs
known
Yes Yes Yes Medium Medium Medium
Antitrust
action
Moderate
risk
Low riskLow riskMedium
Risk
High RiskHigh risk
ClarityHigh High High Low Low Medium

M&A as Strategy
•The different views are as follows:
Strategy as concept
•Strategy as Process
•Concerned with most important decisions of an
enterprise.
•Strategic planning process
• - set of formal procedure
• - Informally in the mind managers

M&A as Strategy
•Individual strategies, plans, Policies or procedures
are utilized.
•Strategic planning as behavior A way of thinking
•- Requiring diverse inputs from all segments
• - Everyone must be involved
•Responsibility resides with Top executive.

M&A as Strategy
•Ten Schools of Strategy :
•Reference: Strategy Safari : Henry Mintzberg,
Bruce Ahlstrand, Joseph Lampel

•Design School
•Planning School
•Positioning School
•Entrepreneurial School
•Cognitive School

M&A as Strategy
•Schools of Strategy :
•Learning School
•Power School
•Cultural School
•Environmental School
•Configuration School

Strategy: Design School
•1. The Design School sees strategy
formation as a process of conception.
•Approach :Clear and unique strategies
are formulated in a deliberate process.
The internal situation of the organisation is
matched to external situation of
environment.
•Basis : Architecture as metaphor.
•In Short : Fit : Establish it.

Strategy : Design School
•Contribution : Order, reduced ambiguity,
simplicity . Supports strong visionary
leadership.
•Limitations :Simplification may not exist
in reality, Strategy has many variables and
is inherently complex.
•Typical tools : SWOT analysis, Ashridge
Mission Model.
•Symbolically represented by : Spider

Strategy : Planning School
•2. Planning School : sees strategy
formation as formal planning process.
•Approach : A rigorous set of steps are
taken, from the analysis of the situation to
the execution of the strategy.
•Basis: Urban planning, system theory,
cybernetics
•In short: Formalise : Strategy should be
like a machine.

Strategy : Planning School
•Contribution: Gives direction, enables
resource allocation, analysis can pre
screen the facts and they can judge the
crafted strategy, facilitates control.
•Limitations: Strategy can become too
static, risk exists of group think, predicting
is difficult
•Typical tools : Scenario planning.
•Symbolically represented by : Squirrel

Strategy :Positioning School
•3. Positioning School: sees strategy as
an analytical process.
•Approach : It places the business within
the context of its industry and lloks at how
the organisation can improve its strategic
positioning.
•Basis: Industrial Org. Economics, Military
strategy
•In short : Analyse : Nothing but the facts.

Stategy :Positioning school
•Contribution :Developed Strategic Mgmt into a
science, provides content in a systematic
way ,focus on hard economic facts, useful for
strategy development
•Limitations: Neglects other factors such as
power politics, culture, social elements, biased
towards large firms, number oriented.
•Tools : Competitive analysis, five forces, Value
chain, BCG Matrix, Game theory, art of war.
•Symbolically represented by : Water buffalo

Strategy :Entrepreneurial school
•4.Entrepreneurial School: sees strategy as a
visionary process of an entreprenure.
•Approach : Visionary process takes in the mind
of charismatic founder or leader of the
organisation. It stresses the most innate of
mental states and processes – Intuition,
judgment, experience and insight.
•Basis: Economics
•In short: Envision : The CEO is the architect of
strategy.

Entrepreneurial school
•Contribution: A sound vision and visionary
CEO can org. to sail through muddy waters
especially in early years of the org. Deliberate in
broad lines. Flexible and emergent in the details.
•Limitations: How can you find the right leader
with all of the needed quality? Being CEO is
extremely demanding in this perspective.
•Typical tools: Visionary leader, leadership
styles.
•Symbolically represented by: Wolf.

Strategy :Cognitive School
•5. The Cognitive school : sees strategy
formation as a mental process.
•Approach : It analyses how people perceive
patterns and process information. It
concentrates on what is happening in the mind
of the strategist and how it processes the
information.
•Basis: Psychology.
•In short : Frame “I’ ill see when I believe it.”

Cognitive school
•Contribution :Strategy as cognitive process in
the mind of strategist, emerge as maps,
schemes and frames of reality, stresses creative
side of strategy process.
•Limitations: Not very practical beyond the
conceptual stage, not very practical and not very
useful to guide collective strategy process.
•Tools: Whole Brain Model, Group think
•Symbolically represented by : Owl

Strategy: Learning School

•6.The Learning School: sees strategy
formation as an emergent process.
•Approach : The management pays close
attention over time to what does work and what
does not. They incorporate lessons learnt into
their overall plan of action. Strategies must
emerge in small steps, as org. adapts or learns
•Basis : Education , Learning
•In short: Learn, if at first you don’t succeed, try
again.

Strategy : Learning school
•Contribution: No need for omnipotent leader,
More people can learn than just one leader,
strong in complex conditions with continuous
change, strong in professional organisations.
•Limitations: This school could lead to no
strategy or just doing tactical maneuvering. Not
useful at crisis Taking many sensible small steps
does not necessarily add up to a sound total
strategy. There are costs attached to learning.
•Tools: Forget, borrow, learn framework,
Knowledge management.
•Symbolically represented by: Monkey

Strategy: The Power school
•7.The Power School : sees process of
strategy formation as a process of
negotiation.
•Approach : The strategy is developed as
a process of negotiation between power
holders within the company and its
external stakeholders.
•Basis: Political science
•In short: Look out for number one.

Strategy: Power school
•Contribution: Can help to let the strongest
people survive in corporate jungle. Realistic,
particularly useful to understand strategic
alliances, joint venture and to do stakeholder
analysis.
•Limitations: Politics can be divisive, uses a lot
of energy, causes wastages and distortions and
is costly , overstates the role of power in
strategy formation.
•Tools: Core Group theory, Force field analysis
•Symbolically represented by :Lion

Strategy : Cultural school
•8. Cultural school : sees strategy formation as
collective process.
•Approach: Tries to involve the various groups
and departments within the co. for collective and
co operative formation of strategy which is
reflection of corporate culture.
•Basis: Anthropology.
•In short : Coalesce : An apple never falls far
from the tree.

Strategy : Cultural school
•Contribution: Emphasises the crucial role that
social processes, beliefs and values are playing
in decision making and strategy formation.
Explains resistance to strategic change, helps to
deal with dominant values in the organisation and
mergers and acquisitions.
•Limitations: Vague, can feed resistance to
change and can be misused to justify status quo.
•Tools : Cultural dimensions/ cultural intelligence
•Symbolically represented by: Peacock

Organisation Culture
• Organization culture:
• How organization carries out the strategic thinking and planning
processes will vary with it cultures.
• Strong top leadership v/s Team appraisals.
• Management by formal paperwork v/s Management by
wandering around.
• Individual decisions v/s Group decisions.
• Rapid evaluation based on performance v/s Long term
relationship based on loyalty.
• Rapid feed back for change v/s Formal bureaucratic rules and
procedures.
• Risk taking encouraged v/s one mistake and you are out.
• Narrow responsibility v/s everyone in this is a salesman cost
controller, product quality manpower or so on.
• Learn from customer’s v/s we know what is best for customers.

Strategy : Environmental School
•9. Environmental School : sees strategy
formation as a reactive process.
•Approach : The strategy is a response to
challenges imposed by the external
environment.
•Basis : Biology.
•In short: Cope . It all depends.

Strategy: Environmental school
•Contribution: Gives central role to environment
in strategy formation.
•Limitations : Dimentions of environment are
often vague and aggregated. This renders it less
useful for strategy formation. Denies strategic
choice for organisations.
•Tools: Contingency theory/ situational
leadership.
•Symbolically represented by: Ostrich

Strategy: Configuration school
•10. Configuration school :Sees strategy
formation as a process of transformation.
•Approach : Strategy formation is a
process of transforming organisationfrom
one type of decision making structure to
another.
•Basis : Context.
•In short : Integrate, Transform- to
everything there is a season.

Strategy : Configuration school
•Contribution: Strategy and organisational
development are closely integrated and should
be reconciled. Periodically, there is need for
transformation. Key to strategic management is:
adaptable strategic change.
•Limitations: In reality there are many shades of
grey not just limited number of valid
configurations.
•Tools : Disruptive Innovations / Chaos /
Catastrophe theory
•Symbolically represented by :Chameleon

M&A as Strategy
•Essential elements in strategic planning
processes:
•Assessment of changes in the environment.
•Evaluation of company capabilities and
limitations.
•Assessment of expectations of stakeholders.
•Analysis of company, competitors, industry,
domestic economy, and international
economies.

M&A as Strategy
•Formulation of missions, goals and policies for master
strategy.
•Development of sensitivity to critical external
environmental changes.
•Formulation of Long-range strategy programmes.
•Formulation of internal organization performance
measurements.
•Formulation of mid-range and short run plans.
•Organization, Funding and other method to implement
all preceding elements.
•Information flow and feedback system
•Review and evaluation process.

M&A as Strategy
•Alternative strategy methodologies:
•SWOT or WOTS Up: Inventory and analysis of
organization strength, weaknesses, environmental
opportunities, and threats.
•Gap Analysis: Assessment of goals v/s forecasts or
projections.
•Top down / Bottom up: Company forecasts v/s
aggregation of segments.
•Computer models: Opportunity for detail and
complexity.
•Competitive Analysis: Assess customers, suppliers,
new entrants, products and product substitutability.

M&A as Strategy
•Synergy : Look for complementarily
•Logical incremental: Well supported moves
from current bases.
•Muddling through: Incremental changes
selected from small no. of policy alternatives.
•Comparative histories: Learn from
experience of others.
•Delphi Technique: Iterated opinion reactions.
•Discussion group technique: Simulating
ideas by unstructured discussions aimed at
consensus.

M&A as Strategy
•Adaptive Processes: Periodic
reassessment of environmental
opportunity and organization capability
adjustment required.
•Environmental scanning: Continuous
analysis of relevant environments.
•Intuition: Insights of brilliant managers.
•Entrepreneurship: Creative leadership.

M&A as Strategy
•Discontinuities: Crafting strategy from
recognition of trend shifts.
•Brain storming: Free form repeated
exchange of ideas.
•Game theory: Logical assessment of
competitor’s actions and reactions.
•Game playing: Assign roles and
simulate scenarios.

M&A as Strategy
•Alternative Analytical framework:
•Product Life cycles: Introduction, Growth,
maturity, and decline stages with changing
opportunities and threats.
•Learning curve: Costs decline with
cumulative volume experience resulting in first
mover competitive advantages.
•Competitive Analysis: Industry structure,
rivals reactions, supplies and customer
relations, product positioning.
•Cost leadership : Low cost advantages

M&A as Strategy
•Product differentiation: Develop product
configuration that achieve customer preference.
•Value chain Analysis: Controlled cost outlays to add
product characteristics valued by customers.
•Niche opportunities: Specialize to needs or interest
of customer groups.
•Product breadth: Carry over of organizational
capabilities.
•Correlation with profitability: Statistical studies of
factors associated with high profitability measures.
•Market share: High market share associated with
competitive superiority.

M&A as Strategy
•Product quality: Customer allegiance and price
differentials for higher quality.
•Technological leadership: Keep at frontiers of
knowledge.
•Relatedness matrix: Unfamiliar markets and products
involve greatest risk.
•Focus matrix : Narrow v/s Broad
•Growth / share matrix: Aim for high market share in
high growth markets.
•Attractiveness matrix : aim to be strong in attractive
industries
•Global matrix: Aim for competitive strength in
attractive countries.

M&A as Strategy
•Approaches to formulating Mergers
and Acquisitions strategy:
•Boston Consulting Group
•The Porter Approach
•Adaptive Processes

M&A as Strategy
•Boston Consulting Group:
•The three important concepts of BCG are as follows:
–Experience curve
–Product life cycle
–Portfolio balance
–Experience curve:
•It represents a volume-cost relationship. It is argued
that as the cumulative historical volume of output
increases, unit cost will fall at a geometric rate. This
will result from specialization, standardization, learning
and scale effects.
•The firm with target cumulative output will have lower
costs, suggesting a strategy of early entry and
price policy to develop volume.

M&A as Strategy
–Product life cycle:
•Every product or a line of business proceeds through four places:
•Development
•Growth
•Maturity
•And decline
•During first two stages, sales and growth is rapid and entry is easy.
As individual firms gain experience and as growth slows in last 2
stages, entry becomes difficult, because of cost advantages of
incumbents.
•In declining stage of product line, (as other substitutes emerge)
sales and prices decline, firms which have not achieved a favorable
position on the experience curve become unprofitable and either
merge or exit from the Industry.

M&A as Strategy
–Portfolio Approach:
•Rapid growth may require substantial investments. As
requirements for growth diminish, profits may generate
more funds than required for investments.
•Portfolio balances seeks to combine
•Attractive investment segments ( stars)
•Cash generating segments (cash cows)
•Eliminating segments with unattractive prospects (Dogs)
•Overall, total cash inflows will balance and corporate
investments.

M&A as Strategy
•The Porter Approach:
•Michael Porter suggests the following:
•Select an attractive industry.
•Develop competitive advantage through
cost leadership and product
differentiation.
•Develop attractive value chain.

M&A as Strategy
–Attractive Industry in which:
•Entry barriers are high.
•Suppliers and buyers have only modest
bargaining power.
•Substitute products or services are few.
•Rivalry among 'competitors' is stable.

M&A as Strategy
–Unattractive Industry will have:
•Structural flows
•including plethora of substitute materials
•Powerful and price sensitive buyers.
•Excessive rivalry caused by high fixed
costs and large group of competitors,
many of whom are state supported.
•E.g.: Steel Industry.

M&A as Strategy
–Competitive Advantage:
•It may be based on cost leadership,
product differentiation. Cost advantage is
achieved by consideration of wide range of
checklist factors including BCG's learning
curve theory

M&A as Strategy
–Value chain:
•A matrix that relates the support activities of:
•Infrastructure
•Human Resource Management
•Technology development
•Procurement
•Operations
•Marketing / Sales / Service
•Aim is to minimize outlays in adding
characteristics valued by customers.

M&A as Strategy
•Adaptive Processes:
•Adaptive processes orientation involves
marketing resources to investment
opportunities under environmental
uncertainty compounded with uncertain
competitor’s actions and reactions. It
involves ways of thinking which assess
competitor’s actions and reactions in
relation to changing environments.

M&A as Strategy
•Planning for Merger and Acquisition
–Search for acquisition of Target Company based
on objectives of the acquirer company
–Search For Intermediaries

M&A as a strategy
•Due diligence : It is process through which a potential
buyer evaluates
•A target company
•Or its assets for acquisition.
•Different types of due diligence include :
•Financial due diligence
•Legal due diligence
•Operational due diligence
•IP due diligence
•IT due diligence and HR due diligence.

M&A as Strategy
•Primary investigation about Target
Company: Due Diligence – Check List
–.
–.

M&A as Strategy
•Primary investigation about Target Company
Contd..
–.
–.

M&A as Strategy
•Primary investigation about Target Company
Contd..
–.

M&A as Strategy
•Other Information
–Inventory valuation, obsolescence, over valuation.
–Litigation
–Doubtful debts
–Unrealized / Unrealizable Assets / Investments
–Tax status / Assessments / Outstanding dues
•Economic Analysis
–Business Cycles
–Public Interest
–Government Prices / Incentives
–Condition of securities market
•Comparison of Alternative Target companies and
Arrival of decision as regards target company

M&A as Strategy
•Intellectual Property due diligence : ( IP due
diligence):
•Process of investigating IP rights : Trade Marks, Copy
Rights , Patents :
•Due diligence should reveal :
•Who owns these rights ?
•Are the rights valid, transferable and enforceable?
•Are there any agreements or restrictions that prevent the
party from granting rights to others?
•Is the property registered I the relevant office?
•Are there any shortcomings or defaults , past Litigation ?

M&A as strategy
•Independent Investigation methods:
•Check at Indian registries of patents ,
trade marks and copy rights.
•US and foreign trademarks, patents and
copyrights and filings
•WTO/ WIPO web sites
•UCC filings :Internet / news /database
searches.

M&A as strategy
•Problems in due diligence:
•Lack of adequate information
•Quality of information
•Insufficient disclosures
•Standard of Corporate Governance

M&A as Strategy
•Strategy for takeover - method to be employed.
–Friendly take over through negotiations
–Hostile
•Valuation of Assets and arriving at Purchase
consideration.
•Mode of Payment
–Cash
–Share Exchange Ratio
•Legal formalities
–Takeover code
–Company law
–Income tax / SICA / IDR / MRTP
•Post Merger Integration.

M& A : Valuation
•Concept of Value : Measurement of value
•TSR
•Market Capitalisation
•Enterprise value
•EVA
•Synergy Valuation
•Value Creation
•Value Frame work

Value with
Internal
improvements
Value with
Internal
Improvements
And disposals
Value with
Internal
Improvements
And disposals
And growth
Total potential
Value
Market Value
Value as is
Operating
improvement
Disposal
New Growth
Opportunities
Financial
Engn.
Maximum
Opportunity
Perception
Gap
Corporate
Strategy :Value
Framework

M&A : Valuation
•Value and Price :
•Value of a particular business or asset may
be different for different parties depending
upon strategic intent, synergies or for other
reasons.
•Value must be clearly distinguished from price
and businesses may justifiably undertake to
consummate a transaction at a price which
does not fall within an assessed fair value
range.

M&A Valuation
•Given the valuations or valuation range /
band suggested by valuers, the
prerogative to decide upon a specific price
is finally with the management and the
Board of Directors of the Company.

M&A : Valuation
•The valuation is only a tool to aid
management in decision-making.
•The valuation is also time dependent.

M&A : Valuation
•Rationale of Valuation in M&A :
•Valuation plays a central part in acquisition
analysis. The bidding firm or individual has
to decide on a fair value for the target firm
before making a bid, and the target firm
has to determine a reasonable value for
itself before deciding to accept or reject
the offer.

M&A : Valuation
•But acquisition valuations are complex
because of the issues like:
•Synergy : Can synergy be valued? And
How?
•Control : What is the value of premium for
control and how can you estimate it?

M&A : Valuation
•Synergy refers to the potential additional
value from combining two firms, either
from operational or financial sources.
•Operating synergy :
•Operating synergies are those synergies
that allow firms to increase their operating
income, increase growth or do both.
Operating synergies can
be categoried into four types:

M&A : Valuation
•Operating synergies :
•1.Economies of scale that may arise
from merger allowing the combined firm to
be more cost efficient.
•2.Greater pricing power from reduced
competition and higher market share
•3.Combination of different functional
strength : Marketing and Production
complimentarity.

M&A Valuation
•4. Higher growth in new or existing
markets : Example : US Consumer
product firm acquiring a firm in emerging
market with higher growth rate.
•Operating synergies can change the
margins and growth of combined firm
and through these changes the value of
the combined firm also undergoes
change.

M&A Valuation
•Financial Synergy :
•Financial Synergy may result in excess cash
flows or lower cost of capital on account of
following:
•1.A combination of firm with excess cash or
cash slack : can yield a better pay off in terms
of higher value for the combined firm. The
increase in value comes from the projects that
were taken with excess cash which otherwise
would not be taken This synergy is likely to
show up most when large firms acquire smaller
firms .

M&A Valuation
•2.Debt Capacity : The debt capacity can
increase : because , when two firms
combine , their earnings and cash flows
may become more stable.
•3. Tax benefits : can arise by taking
benefits of the tax laws.

M&A Valuation
•Hence, if synergy is perceived to exist in
M&A, the value of the combined firm
should be greater than the sum of values
of the bidding and target firms, operating
independently.
• V (AB) > V(A) + V(B)
V(AB): = Value of combined firm
V(A) = Value of firm A operating independently
V(B) = Value of firm B operating independently

M&A Valuation
•Valuation Methods : A select List :
•Asset Approach
–Book Value, Adjusted Book Value, and
Liquidation Value
•Income Approach
–Capitalization of Earnings, Capitalization of
Excess Earnings, and Discounted Future
Earnings/Cash Flows, Discounted Future
EVAs.

M&A : Valuation
•Valuation Methods : Select list
•Market Approach
–Current Market Prices, Historical Market Prices,
Price to Earnings, Price to Revenue, Price to
Book Value, Price to Enterprise Value, etc.
•Comparable Transactions/Relative Valuations
–Comparable International and Domestic
Transactions.
•Sum-of-parts Method
•Real Options Value

M&A : Valuation
•Asset Approach : When used?
•May be important in capital intensive
industries or in acquisitions where valuable
non-operating assets can be stripped after
the purchase of the company to recover part
of acquisition cost.
•Where there are no (or very little) intangibles.
•This approach is inappropriate in case of
acquisition/sale of minority interests.

M&A Valuation
•Basis of Asset Approach :
•Sale as a going concern:
–Value-in-use
•Fair market value of assets and liabilities
•Sale on a liquidation premise:
–Liquidation value (value-in-exchange)
•Orderly liquidation.
•Forced liquidation
•Treatment of non-recurring/ non-operating assets and
liabilities in case of valuation of controlling/ minority
interest.

M&A Valuation
•Net Asset Method:
•Also termed as Balance Sheet Method,
Asset Backing Method or Break up value
method.
• For instance:If assets total Rs.
50,000 and liabilities Rs. 10,000.
• No. of shares 20,000
• Net Asset value: Rs. 2

M&A Valuation
•Points to be considered: ( Net Asset value method)
•a) Proper value to be placed for Goodwill of the business.
•b) Fictitious Assets such as Preliminary expenses, debit balance in profit
and loss account etc to be excluded.
•c) All other assets (including non-trading assets such as investments)
should be taken at market value. In absence of information about market
value -- Book values may be taken.
•d) Liabilities payable to third parties and preference share capital should be
deducted from total assets.
•e) It should be noted that item constituting part of the equity shareholders
funds
• (E.g. General Reserves; Profit and loss account credit balance,
Debenture
• Redemption Fund, Dividend Equalisation fund, Contingency Reserves
should not be deducted.
•f) Net Assets so arrived at should be divided by no. of equity shares.

M&A Valuation
•Income Approach : when used ?
•It is more commonly as well as often used
than market/asset approaches.
•It is a preferred approach for closely held
(and also widely held) knowledge based
companies.
•It is also used in case of service industries.
•Of course, it suffers from accounting
distortions. Hence caution is advised.

M&A Valuation
•Income Approach : Two methods :
•Single-period Capitalization Method:
–Valuation is based on the net income of one
year only and hence it can produce reliable
value only if the income chosen is
representative of the company’s anticipated
long-term future performance.
•Multi-period Discounting Method:
–Discussed under DCF method.

M&A Valuation
•DCF Method : Certain issues :
•Forecast variables
•Forecast Horizon:
–Period should be long enough to portray all
anticipated variations in the entity’s cash flows and
until a stabilized cash flow is achieved.
•Continuing Value
•Cost of Capital
–Debt cost
–Equity cost
–Weighted Average Cost of Capital (WACC)

M&A Valuation
•DCF : Certain issues:
•Cost of Debt:
–Direct Approach.
–Weighted Average Method.
–IRR Approach.
•Cost of Equity: CAPM
–What is the risk-free rate?
•Logic of using a long-term rate.
–What is your equity beta?
–How much is the equity risk premium (ERP)?

M&A : Valuation
•CAPM: Cost of Equity
– Ke = Rfr + b( m-r)
•Modified CAPM (used for closely held targets)
– Ke=R
fr +β(m-r)+SCP+SCRP
•Where SCP=Small company premium and SCRP=Specific
company risk premium (unsystematic risk- also known as ‘α’).
•Buildup Method (used for closely held targets)
– Ke=R
fr +b(m-r)+SCP+SCRP
•The size of SCRP is usually smaller when used in MCAPM than when
used in buildup method.

M&A Valuation
•Specific Company Risk Premium :
•Should reflect the analysis of the competitive
conditions in which the company operates.
Some common company-specific risk factors:
–Lack of access to capital
–Ownership structure and stock transfer restrictions.
–Company’s market share and the market structure of
the industry
–Depth and breadth of the management
–Heavy reliance on individuals with key knowledge,
skills or contracts.

M&A Valuation
•Control Premium and illiquidity Discount :
•Such premium or discount should be applied in
adjusting cash flows.
•If the target is a closely held company in which a
controlling interest is being acquired, do not
automatically assume that a control premium and a
discount for lack of marketability must be applied to
each value determined for the company.
•The correct methodology is to identify the nature of
the value initially computed by each appraisal
method.

M&A Valuation
•DCF Method : Formula: Free Cash flows to
Equity:
•The FCFE is the residual cash flows left after
meeting interest and principal payments and
providing for capital expenditures to both –
maintain existing assets and create new assets
for future growth.
•FCFE = Net Income + Depreciation – Capital
spending -  Working capital – Principal
repayments + New Debt

M&A Valuation
•Why are Dividends different from FCFE?
•The FCFE is a measure of what a firm can afford
to payout as dividends.
•Desire for stability
•Future investment needs
•Tax factors
•Signaling prerogatives: Increase in dividends is
viewed as positive signals and decreases as
negative signal.

M&A Valuation
Where,
CF to Equity t = Expected Cash flow to Equity in period t
ke = Cost of Equity

M&A : Valuation
•Thus, valuation exercise involves more
judgments than precise facts.
•The success of a valuation exercise
depends on how scientific were you in
your intuitive judgments.
•Hence, valuation is an artistic science.

M&A Valuation

M&A Valuation
•Refer to Valuation Examples
•Refer to Synergy calculation :
-Abhishek Rai
-Damodaran / Compaq /Digital mna file
-EVA Calculations

M&A Deal Structuring
•Having ascertained the value of the target
company, the next question logically will be to
decide how is the payment of consideration
amount going to be made.
•Whether it is all cash transaction ?
•Whether it is all swapping of shares ?
•Whether partly cash and partly shares?
•Even when it is all cash transaction, is cash
readily available or funds will have to be
borrowed ? If borrowed, against what security ?

M&A : Deal Structuring
•Debt v/s Equity : A Firm can raise funds for an
acquisition from either debt or equity.
•The mix will generally depend upon the excess debt
capacity of both – the acquiring company as well as
target company.
•The acquisition of target firm that is significantly
underlevered can be carried out with larger proportion of
debt than the acquisition of the one that is already at
optimal debt ratio.
•It may be noted that the cost of debt to be raised for
payment of target co’s acquisition has not been
considered for valuing the target company.

M&A : Deal Structuring
•Cash v/s Stock :There are three ways in which
an acquiring firm can use equity in such a
transaction :
•First : Use cash it has built up over a time to
finance an acquisition
•Second : It can issue stock to the public, raise
cash and pay for the acquisition.
•Third : Offer stock as payment for the target firm
where the payment is structured as stock swap.

M&A : Deal Structuring
•The question of which of the method will be used by a
firm will require consideration of following facts :
•Availability of cash on hand
•The perceived value of stock : The managers of
acquiring company who believe that their own stock is
trading at significantly below its value, should NOT use
stock as currency in transaction.
•The stock holders of target firm are aware of this, and
may demand a higher premium when the payment is
made entirely in the form of the acquiring company’s
stock.

M&A Deal Structuring
•Conversely, when acquiring company’s
managers perceive that their own stock is
trading at significantly overvalued price they can
successfully issue their own stock in exchange
of shares of target company’s shares.
•Tax factors : Where an acquisition is a
stock swap, the shareholders of target firms may
be able to defer capital gains taxes on the
exchanged shares. This benefit being
significant, the tax swap may offer benefits large
enough to offset any perceived disadvantages.

M&A Deal Structuring
•Share Exchange Ratio : Where the
consideration is settled through stock
swaps, the exchange ratio is required to
be determined : Though this may
invariably be in line with market price of
the stocks the companies may settle for
ratios depending on the relative values of
stocks with suitable modifications.

M&A Deal structuring
•Three Approaches for determining share
exchange ratios:
•Earnings Approach
•Market value Approach
•Book Value Approach

M&A Deal Structuring
•Earnings Approach :
•EPS of Acquired Company
------------------------------------
EPS of Acquiring Company
• E.g. Earning per share of Acquiring Company
is Rs. 5.
•Earning per share of Acquired Company is Rs.
2.
•Exchange ratio: 2 / 5 i.e. 2 shares of acquiring
company for 5 shares of acquired company.

M&A Deal Structuring
•Market value Approach:
•Market price per share of acquired company
-----------------------------------------------------------
Market price per share of acquiring company
• For example:
•Market value of share of Company A: Rs. 50
•Market value of share of Company B: Rs. 25
and if A is acquiring B
• Exchange Ratio : 25 / 50 = 0.5
• i.e. A Ltd. will issue 1 share for 2
shares of B Ltd.

M&A Deal Structuring
•Capitalized Value of EPS
•Steps: 1 ) Determining Average future earnings
• 2) Determining Capitalisation Rate
• 3) Determining of market value
• EPS
• ----------------------------
• Capitalisation Rate
•EPS Rs.30 Capitalisation Rate 15%
•Market value = 30 / 15 x 100 = 200
•Exchange Ratio
• Market Price per share of Acquired Company
---------------------------------------------------------------
Market price per share of the acquiring company

M&A Deal Structuring
•Book Value Approach :
•Book value = Shareholders funds
------------------------------
• No. of shares
• Or Net worth
----------------
No. of shares
•Exchange Ratio =
•Book value per share of the acquired Co.
-----------------------------------------------------------
Book value per share of Acquiring Co.

Deal Structuring
•Accounting Standards for amalgamations:
•Institute of Chartered Accountants have
laid down Accounting Standard AS-14 to
deal with accounting of amalgamations
( Mergers)
•These standards are applicable/
mandatory to all the companies
irrespective of their size- small/ medium or
large.

M&A Deal Structuring
•AS 14 : Classifies Amalgamation / merger
into two types :
•Amalgamation in the nature of merger
•Amalgamation in the nature of purchase
•These standards are for passing of accounting
entries in the books of accounts of transferee or
amalgamated company .
•Transferor company closes its books of
accounts as per normal accounting practices.

M&A Deal Structuring
•Amalgamation in the Nature of Merger to satisfy
following conditions:
•i) All assets and liabilities of transferor co. become the
assets and liabilities of transferee company
•ii) 90% of the shareholders of transferor company agree
to become shareholders of transferee company
•iii) Consideration is settled by issue of shares of
transferee co. except for dissenting shareholders
/fractions which are to be paid in cash
•Iv) Assets and liabilities are taken on record at book
values.

M&A Deal Structuring
•Amalgamation in the nature of
purchase is an amalgamation which does
not satisfy any one or more of the
foregoing conditions.
•There are two methods of accounting for
merger :
•1. The pooling of interest method and
•2. The purchase method

M&A Deal Structuring
•The pooling of interests method : Under this
method, the assets, liabilities and reserves
( except for share capital)of the transferor
company are recorded by the transferee
company at their existing book values.
•The difference between purchase consideration
paid by transferee co. to the transferor co. and
the amount of share capital ( Equity +
Preference) of the transferor co should be
adjusted with reserves.

M&A Deal Structuring
–Reserves Mean : Bal. in P&L a/c, General
Reserves and Capital Reserve.
–If purchase consideration is more than the
share capital of the transferor co.( Equity
+Pref.) ,the amount is to be debited to
reserves.
–If reverse is the case, the difference is
credited to the reserves.

M&A : Deal Structuring
•The Purchase Method :Under this method, the
transferee company accounts for the value of
the assets and liabilities of the transferor co at
value at which these assets and liabilities are
taken over by the transferee co. ( These are
generally taken at fair value).
•Assets do not include fictitious assets and
liabilities do not include reserves and surplus of
transferor co.

M&A Deal structuring
•Purchase Method contd:
•If purchase consideration exceeds the net
assets taken over, the difference is
debited to Goodwill account.
•Net assets = Assets taken over at agreed
value less liabilities taken at agreed value.
•If purchase consideration is less than the
net assets taken over, the difference is
credited to capital reserve.

M&A Deal Structuring
•Statutory Reserves : Statutory Reserves
are those reserves, which are created as
per particular statute/ law which may
require compliance or restrictions with
regard to utilsation as well as maintenance
of reserves for particular purpose as well
as particular period.

M&A Deal Structuring
•Separate accounting entries are not
required for statutory reserves in the case
of pooling of interests method, as all
reserves are recorded at their book
values.
•However, under purchase method, the
reserves being internal entries are not
recorded in the books of transferee co.

M&A Deal Structuring
•Therefore, in purchase method, to comply
with the requirements of particular statute,
the statutory reserve created in the books
of transferor co. Is required to be
maintained for some more years in the
books of transferee co.
•This is done by transferee co by debiting
Amalgamation Adjustment a/c and
crediting Statutory Reserve a/c .

M&A Deal Structuring
•Amalgamation Adjustment a/c shall be
disclosed under the head “ Miscellaneous
Expenditure” and Statutory Reserves
under the head “ Reserves and surplus”.
•When the maintenance of statutory
reserve is no longer required, the entry
passed should be reversed as under :
•Statutory Reserves Dr.
To Amalgamation Adjustment a/c

M&A Deal Structuring
•Treatment of goodwill arising out of
amalgamation : Goodwill arising on
amalgamation represents a payment
made in anticipation of future income and
it is appropriate to treat it as an asset to be
amortised to income on a systematic basis
over its useful life. It is considered
appropriate to amortise goodwill over a
period not exceeding five years unless a
somewhat longer period is justified.

M&A Deal Structuring
•Treatment of Reserves specified in a
scheme of amalgamation:
•The scheme of amalgamation sanctioned
under the provisions of Companies
Act,1956 or any other statute, may
prescribe the treatment to be given to be
to the reserves of transferor company after
its amalgamation. Where the treatment is
so prescribed, the same is followed.

M&A Deal Structuring
•Disclosures: For all amalgamations, the
following disclosures are considered appropriate
in the first financial statement following the
amalgamation :
•a) names and general nature of amalgamating
companies
•b) Effective date of amalgamation
•c) the method of accounting used to effect
amalgamation and
•d) particulars of the scheme sanctioned under a
statute.

M&A Deal Structuring
•For amalgamation under pooling of interests
method following additional disclosures
should be made :
•a) description and number of shares issued,
together with the percentage of each company’s
equity shares exchanged to effect
amalgamation.
•b) the amount of any difference between the
consideration and value of net identifiable assts
acquired , and the treatment thereof.

M&A Deal Structuring
•For amalgamation under purchase method
following additional disclosures should be
made :
•a) consideration for amalgamation and a
description of the consideration paid or
contingency payable, and
•b) the amount of any difference between the
consideration and the value of net identifiable
assets acquired, and the treatment thereof
including the period of amortisation of goodwill
arising on amalgamation.

M&A Deal Structuring
•Amalgamation after the Balance Sheet
date :When the amalgamation is effected
after the balance sheet date but before the
issuance of financial statements, of either
party to the amalgamation, disclosure is
made in accordance with AS4 :
‘Contingencies and event occuring after
the balance sheet date ,‘ but the
amalgamation is not incorporated in the
financial statements.

M&A Deal Structuring
•Difference between AS 14, IFRS -3 and US
GAAP :
•IFRS-3 allows only Purchase Method. AS 14
allows both – pooling of interest as well as
purchase method.
•IFRS -3 requires valuation of assets and
liabilities at fair values, where as AS 14 permits
valuation at book values.
•IFRS -3 requires goodwill to be tested for
impairment, whereas AS 14 requires goodwill to
be amortised.

M&A Deal structuring
•Under US GAAP, FASB 14 has been revised
and the enterprises can no longer use pooling of
interest method. FAS 142 under US GAAP does
not require any amortisation of goodwill, as it
does not treat it as wasting asset. FAS 142
goodwill to be written off when impaired.
•Under IFRS there is a rebuttable presumption
that useful the useful life of goodwill will not
exceed 20 years, from initial recognition, under
AS 14 amortisation of goodwill should not
exceed 5 years unless a somewhat longer
period is justified.

M&A : Defense Mechanism
•Defense mechanisms are the strategies
and tools used by a company to prevent its
takeover. In order to ward off take over bid,
the companies may adopt:
•Preventive Measures
•Defense strategies in the wake of take over
bid.
•These defensive measures are elaborated
below:

M&A Defense Mechanism
• Advance / Preventive Measures:
• Joint holding / Agreements between major
shareholders
• Interlocking / Cross holding of shares.
• Issue of block of shares to friends and Associates.
• Defensive merger with own group company.
• Non-voting shares / Preference shares
• Convertible debentures
• Maintaining part of capital uncalled for making
emergency requirements.
• Long term service agreements.

M&A : Defense Mechanism
• Defense in the wake of takeover bid :
• Commercial Strategies
• Dissemination of favourable information to keep
shareholders abreast of latest developments.
• - Market coverage
• - Product demand
• - Industries outlook and resultant profit.
• Step up dividend and update share price
• Revaluation of Assets
• Capital structure Re-organization
• Unsuitability of offer to be highlighted while
communicating with shareholders.

M&A : Defense Mechanism
•Tactical, defense strategies:
•Friendly purchase of shares
•Emotional attachment loyalty /
participation
•Recourse to legal action

M&A : Defense Mechanism
•Operation white Knight.
•White Knight enters the fray when the
target company is raided by hostile
suitor. White Knight offers bid to target
company – higher than the offer of the
predator that may not remain interested
in the bid.

M&A : Defense Mechanism
•Disposing of Golden jewels :
• Precious assets of the
company are called crown jewels which
attract the raider. Hence as a defense
strategy, company sells these assets at
its own initiative leaving rest of the
company intact. Raider may not remain
interested thereafter.

M&A : Defense Mechanism
•Pac-Man Strategy:
• In this strategy, the target
company attempts to take over the
raider. This happens when Target
Company is higher than the predator.

M&A Defense Mechanism
• Compensation Packages:
• Golden parachutes or First class
passenger strategy termination package for senior
executives is used as protection for Directors.
• Shark Repellants:
• Companies change and amend their
bye laws to make it less attractive for corporate
raider.
• Ancillary Poison Pills:
• Issue of convertible debentures - which
when converted dilutes holding percentage of raider
and makes it less attractive.

M&A : Defense Mechanism
•Case of Arcelor Mittal - Example of Defense
Mechanism in actual practice :
•Board of Directors of Arcelor opposed Mittal on following
grounds:
•a) Loss of jobs for its employees
•b) Corporate Governance issues: Mr. Dolle argued that
Mittal steel is a family owned company, hence corporate
governance would not be up to the mark.
•Mittal family owns 88% of the stock
•For whom is the co working : for Mittals or shareholders?

M&A: Defense Mechanism
•Technological backwardness of Mittals :
•Arcelor tried to point out that Arcelor’s
approach is based on making advanced ,
high value steel items using sophisticated
technology and selling it to customers with
demanding specifications, where as Mittal
steel is focused on low cost production
centres and selling less sophisticated
poducts.

M&A : Defense Mechanism
•Loss making North American Mittal Steel
Holding : Arcelor tried to point out that
Mittal has just emerged out of bankruptcy
proceedings. Therefore, if it has access to
Arcelor funds, it would channelise the
same to resurrect the holding company
instead of developing Arcelor.

M&A : Defense Mechanism
•Increase in dividends to shareholders :
Arcelor increased dividends by 85% : from
65 cents per share in 2004 to Euro 1.20
per share in 2005.
•Posted 52% rise in fourth quarter profit.

M&A: Defense Mechanism
•Legal angle: Govt in Luxembourg thought
of a proposal to enact new laws curbing
take over by foreign companies.
•White Knight : Russian company Severstal
appeared to issue competitive bid.

M&A : Legal Aspects
•SEBI Take over code
•Companies Act
•FEMA
•SICA
•Income Tax
•Stamp duty
•Competition Act

M&A SEBI Takeover Code
•Acquisition and Takeover
Regulations 1997
•(SEBI Regulations)
•Securities Exchange Board of India
(SEBI) is a market regulator and has
issued takeover guidelines popularly
called takeover code as under:

SEBI Take over code
•Important Concepts:
•Acquirer : Any person who directly or
indirectly acquires or agrees to acquire,
shares or voting rights in the target
company,
•Acquires or agrees to acquire control over
the target company.
•Indirect or covert acquisition of shares or
control would also trigger this code.

M&A SEBI Take over code
•Control : Two important concepts:
•Right to appoint majority of the directors
•The right to control the management or policy decisions
exercisable by a person.
•Persons acting in concert: Regulation 2 lists out
categories of ten persons such as company, holding co,
directors, mutual funds, merchant bankers, FIIs, Banks
etc who together try to acquire shares of the target
company. These persons are deemed to be acting in
concert unless contrary is established.
•Target company : means a listed company whose
shares or voting rights or control is directly or indirectly
acquired or is being acquired.

M&A :SEBI Take over code
•Exempted Categories:
•Allotment in pursuance of an application
made in public issue.
•Allotment in pursuance of Rights Issue
•Preferential Allotment made in pursuance
of Sec. 81 (1A)
•Allotment in pursuance of an underwriting
agreement.

M&A : SEBI Take over code
•Inter se transfer of shares amongst :
•Group companies
•Relatives
•Promoters / Indian promoters and foreign
promoters who are shareholders

M&A : SEBI Take over code
•Acquisition of shares in ordinary course
of business by:
•Registered stock broker of stock
exchange on behalf of clients
•Registered market maker of a Stock
Exchange
•Public financial institution on their own
account
•Banks / Financial Institutions as pledge

M&A SEBI Take over code
•Acquisition of shares by way of transmission or
succession or inheritance.
•Acquisition of shares by government
companies
•Transfer of shares from state level financial
institutions including subsidiaries pursuant to
agreement between such FIs and Promoters.
•Transfer of shares by venture capital funds to
promoters.
•Under BIFR scheme

M&A : SEBI Take over code
•Acquisition of shares of companies not listed
/other cases as may be exempted by SEBI.
• In respect of exempted cases for acquisition
exceeding 25%
•Application to be made to SEBI within 21 days
•Giving details / reasons seeking exemption
•Payment of fee to SEBI Rs. 10,000/-

M&A SEBI Take over code
•Disclosure required to be made in
respect of acquisition of shares /
Voting rights.
•Existing shareholders holding more
than 5% of shareholding / voting rights
•Disclosure to be made to the company
within 2 months from the date of SEBI
Regulations.

M&A : SEBI Take over code
•Acquisition of 5% and 10% of voting rights:
•Disclosure to be made to company within 4 working days of
Receipt of intimation of allotment of shares / Acquisition of shares
•Company to disclose to all stock exchanges where shares are
listed
•Within 7 days of receipt of information.
•Continual disclosure by those who held more than 15%
Within 21 days from the close of financial year
•Company to make annual disclosure
Within 30 days from the close of financial year

M&A: SEBI Take over code
•Substantial Acquisition / Public
Announcement :
•Acquisition of 25% or more shares /
voting rights
•Public announcement to be made for
acquiring further 26% voting shares of
the company.

M&A SEBI Take over code
•Conditions precedent to public announcement
•Appointment of Merchant Banker
•Timing of Announcement, within 4 working days of
entering into agreement for acquisition of shares
•Publications of announcement : In all editions of the
English daily, one Hindi daily, one Regional language
daily where registered office of company is located.
•Copy to be submitted to: SEBI, Stock Exchange and
Target Company

M&A SEBI Take over code
• Contents of Public Announcement Offer :
• Target company
• Existing paid up capital
• No. of fully paid shares
• No. of partly paid shares
• Total number of percentage shares of the target company to be
acquired from the public by the acquirer subject to minimum of
20% of voting capital of the company.
• Minimum offer price
• Mode of payment of consideration.
• Identity of acquirer / acquirers
• Existing holding

M&A SEBI Take over code
•Agreement to acquire shares
Date of Agreement
Name of the seller
•Price of which shares are to be acquired.
•No. of percentage of shares to be acquired.
•Price paid by acquirer and persons acting in concert
with him, during last 12 month
The highest price
The average price
•Object and purpose of acquisition and future plans.
•Date of opening of offer / closing of offer
•Date by which purchase consideration would be paid

M&A : SEBI Take over code
•Disclosure to the effect that firm financial arrangement
required to implement has been made.
•Other statutory approvals if any;
Approval of Banks / Institutions
•Minimum level of acceptances from the shareholders
•Such other information as is essential for the
shareholders to make informal decision.
•Submission of letter of offer to SEBI within 14 days
from the date of public announcement made.
•Letter of offer not to be dispatched to shareholders -
not earlier than 21 days from its submission to SEBI.

M&A : SEBI take over code
•Specified date
•Acquirer to specify a date for the
purpose of determining the names of
the shareholders of the target
company to whom letter of offers have
been sent. Specified date shall not be
later than 30th day from the date of
public announcement.

M&A SEBI Take over code
• Minimum number of shares to be acquired:
• 26% of voting capital;
• Acquirer may take more than 26% if he so desires
but in that case 50% of consideration is to be
deposited in escrow account.
• Reduction of public holding below 10%:
The acquirer within 3 months to acquire remaining
shares (Resulting into delisting of shares)
Or
Disinvest through an offer for sale or by public issue
within a period of 6 months.
• If the shares offered are more than the shares
agreed to be acquired : acquisition on pro rata basis.

M&A SEBI Take over code
•Minimum offer price shall be highest of
•(For frequently traded shares)
•The negotiated price under agreement for
acquisition
•Highest price paid by the acquirer the concert -
including public or right issue during 26 weeks
prior to public announcement.
•Price paid by acquirer under preferential
allotment made to him.
•Average of weekly high low during last 26
weeks.

M&A SEBI Take over code
•If shares are not frequently traded:
•Minimum price will be in consultation with
Merchant Bankers based on the following
factors:
•Negotiated price
•Highest price paid in past 26 weeks

M&A SEBI Take over code
• Director’s Obligations:
• Responsibilities of Acquirer company's Directors:
• Directors of the company to accept responsibility for offer
brochure, circulars, letter of offer or any advertising material.
• Exemption from the Liability:
• If any director seeks exemption, such director to issue
statement to that effect together with reasons thereof.
• Prohibition to become a Director:
• During the offer period, the acquirer or person acting in concert
with him shall not be entitled to be appointed on the Board of
Directors of Target Company.

M&A SEBI Take over code
•Restrictions on existing Directors:
•Existing Director is an insider within the
meaning of SEBI Regulations and such a
person shall refuse himself / and not
participate in any matters concurring or
relating to the offer including any
preparatory steps leading to the offer.

M&A SEBI Take over code
• Other Duties
• Open escrow account on or before the date of issue of public
announcement of offer.
• Make financial arrangements for fulfilling obligation.
• To complete the procedures relating to offer within 30 days from the date
of closure.
• Prohibition of further offer of shares
• If acquirer has withdrawn the offer, he shall not make further offer for
acquisition for a period of six months.
• And if he has violated SEBI rules, he cannot make offer for any listed
company for a period of 12 months.
• Disclosure of acquisition within 24 hours to
• Stock exchanges
• Merchant banks
• Details: No. of shares, Price paid, mode of acquisition.
• Prohibition of disposal or encumbrance of shares acquired, for 2 years
unless specifically stated.

M&A : SEBI Take over code
•General Obligations of Target
Company
•During the period offer Target Company
should not
- sell, transfer or dispose of the assets of
the company
- issue any authorized but un-issued
securities
- enter into material contracts

M&A : SEBI Take over code
•List of shareholders to be furnished as
required by the Acquirer:
•Within seven days of the request or
specified date whichever is later.
•Once public offer is made, cannot appoint
any additional director or fill in any
casual vacancy by any person
representing or having interest in the
acquirer company.

M&A : SEBI Take over code
•Director can send unbiased comments on
the offer to shareholders but Misstatement
/ concealment of material information will
make them liable for action.
•Facilitate the acquirer in verification of
securities tendered for acceptances
•Transfer of securities in favour of the
acquirer in certification of merchant
bankers.

M&A : SEBI Take over code
•General Obligations of Merchant Bankers
•Merchant Bankers to ensure that:
•Acquirer is able to implement the offer made
in terms of public announcement of offer.
•Provisions relating to escrow account is made
•Firm arrangement of funds / money for
payment through verifiable means to fulfill
SEBI regulations.

M&A: SEBI Take over code
• Obligations of merchant bankers : contd
• Contents of public announcement of offer and offer
letter are true, fair and adequate and based on
reliable sources.
• Filing of letter of offer with SEBI, Target company
and also Stock Exchange where shares are listed.
• Issue of due diligence certificate
• Compliance with SEBI regulations
• Directions to Bank for release of escrow account.
• Report to SEBI: Within 45 days of closure of offer

M&A SEBI Take over code
•Competitive bids
•Public announcement of competitive bid
to be made
•within 21 days of first announcement of
offer
•by any person

M&A SEBI Take over code
• Quantum of Competitive bid should be at least equal to the
number of shares, which was made under first offer.
• Option to First Acquirer:
• Revise his offer
• Withdraw his offer with SEBI approval
• Upward Revision of offer price
• Any time up to 7 working days prior to the date of closure of offer.
• Acquirer shall not have the option to change other items.
• Increase escrow amount up to 10% of consideration payable on
revision.
• Public announcement in all newspapers in which original offer
was made.
• Inform : SEBI
Stock Exchange
Target Company

M&A SEBI Take over code
•Closure of offer:
•When there is a competitive bid, the date
of closure of original bid as well as date
of closure of all subsequent bids shall be
the date of closure of public offer and the
last subsisting competitive bid.

M&A SEBI Take over code
•Withdrawal of offer:
• Once acquirer has made an announcement of
public offer he can not withdraw unless:
•Withdrawal is consequent upon competitive bid by
another.
•Statutory approvals required have been refused.
•The sole acquirer being natural person dies.
•Such circumstances which SEBI may permit.
•Withdrawal by -
•Public announcement in all publications when offer
was made
•Inform : SEBI, Stock Exchange and Target company

M&A SEBI Take over code
• Other Aspects - Escrow Account:
• The acquirer shall on the date of public announcement of offer
create escrow account by way of security for performance
obligations under SEBI rules:
• Amount :
• For consideration upto Rs. 100 crores 25%
• Above Rs. 100 crores 25% upto Rs. 100
crores and
10%
• thereafter
• For offers which are subject to minimum level of acceptances
and the acquirer does not want to acquire more than 20% :

50% of consideration
• Total consideration to be calculated for highest price.

M&A SEBI Take over code
•Escrow Account to consist of
•Cash deposit with scheduled bank
•Bank guarantee
•Deposit of acceptable securities with
appropriate managing with Merchant
Banker.

M&A SEBI Take over code
•Conditions to be fulfilled
•Cash deposit with scheduled bank: Acquirer to
empower merchant banker to issue cheque /
DD as per SEBI rules.
•Bank Guarantee
To be in favour of Merchant
Banker
•Valid for a period of public announcement plus
30 days from the closure of offer

M&A SEBI Take over code
•Escrow with Security:
•Empower merchant banker to dispose of
security by sale or otherwise.
•The guarantee / Securities shall not be
returned till all the obligations under
SEBI Regulations are complied with.

M&A SEBI Take over code
•Increase in value of Escrow:
•Upon upward revision of offer:
•Additional value of 10% of consideration
payable on such revision
•Additional deposit of 10% of value increases in
consideration.
•When Bank guarantees have been given as
securities:
•Acquirer to give at least 1% of consideration
payable by way of security

M&A SEBI Take over code
• Release of Escrow Account
• The entire amount to the acquirer upon withdrawal of offer with
certificate of merchant banker.
• Transfer of 90% to Special account opened and to the acquirer,
balance 10% of cash on completion of all this formalities.
• Entire amount to Merchant Banker in the event of forfeiture due
to non fulfillment of SEBI Regulations.
• In the event of forfeiture :
• Merchant Banker will distribute
• 1/3 rd of the amount to Target company
• 1/3 rd to Stock Exchange
• 1/3 rd to be distributed pro-rata among shareholders who
accepted the offer

M&A SEBI Take over code
•Forfeiture of Escrow Account
•In case of non fulfillment of obligations
under SEBI regulations, SEBI shall forfeit
escrow account in full or part.
•The merchant banker shall ensure
realization of escrow account by
•foreclosure of deposit
•Invoking bank guarantee
•Sale of security

M&A SEBI Take over code
•Payment of Consideration :
•Consideration payable in cash: within 21 days
from the closure of offer.
•Open a special account with Banker to the
Issue.
•Consideration payable in exchange of security:
Acquirer to ensure that securities are actually
issued and dispatched.
•Unclaimed balance: To be transferred to
Investors Protection fund after 3 years of date
of deposit.

M&A SEBI Take over code
•Bailout Takeover

•What is bailout takeover?
• Bail out take over of financially weak but not
sick unit.
•Financially weak: Erosion of 50% of its net
worth but less than 100%
•Responsibility: Lead Institution to be
responsible to ensure compliance of SEBI
Regulations.

M&A SEBI Take over code
•Approval by Lead Institution:
•Taking into account financial viability
•Assessing requirement of funds for revival
•Drawing up revival package
•Scheme may provide for:
•Change in management
•Exchange of shares
•Combination of both

M&A SEBI Take over code
•Manner of Acquisition:
•Invitation of offer
•Information to offerors
–Management
–Technology
–Range of products
–Shareholding pattern
–Financial holding
–Past performance

M&A SEBI Take over code
•Selection of the Party:
•Management competence
•Adequacy of Financial Resources
•Technical Capability
•Manner of evaluating bid:
•Purchase Price
•Track Record
•Financial Resources
•Reputation of management

M&A SEBI Take over code
•Powers of SEBI under this regulation :
•Power to investigate
•Power to appoint auditors to investigate into the
books of accounts or affairs of persons
concerned
•Power to issue directions
•Powers to impose penalties for non compliance
•A person aggrieved by SEBI order may prefer an
appeal to SAT.

M&A : Legal aspects: Companies
Act
• Compliance under Companies Act
• Companies Act does not define ‘Amalgamation’ or
merger. However, provisions under sections 391 to
396 deal with ‘Arrangements and compromise’ apply
to Mergers and Acquisitions.
• Section 391 Power to compromise or make
arrangements with creditors and members
• Section 392 Power of High Court to enforce
compromises and arrangements
• Section 393 Information as to compromise and
arrangements with creditors and members

M&A : Legal Aspects : Companies
Act
• Section 394 Provisions for facilitating reconstruction’s and
amalgamation of companies
• Transfer to the transferee company of the whole or any part of
the undertaking, property or liabilities of the transferor company
• The allotment or appropriation of the transferee company of any
shares / debentures or other interests in the transferor company
under the compromise arrangements.
• Continuation by the transferee company of any legal proceedings
pending by or against Transferor Company.
• Dissolution without winding up of Transferor Company
• Provision for dissenting members
• Other consequential / supplementary matters.

M&A :Legal Aspects : Companies
Act
•Section 395 Power to acquire shares of
dissenting shareholders under the scheme
approved by the majority.
•Section 396 Power of the Central
Government to provide for amalgamation
in national interest.

M&A:Legal Aspects Companies Act
•Checklist of procedure for Amalgamation of
Companies:
•Review the Memorandum and Articles of Association of
all amalgamating companies to verify :
•Power to amalgamate exists: Though these are views
that such power is not necessary, it is appropriate to
consider amendment of memorandum to include such
powers.
•Objects of Transferee company: Should include power
to carry on the business of transferor company if not
amend the memorandum of transferee company by
amending the objects.
•Any provisions under Articles: Requiring any special
procedure to be followed or approvals to be obtained.

M&A: Legal Aspects: Companies
Act
•Ensure that audited Accounts for the period
ending on the appointed date are ready.
•Hold Board Meetings: For approval of
amalgamation and other incidental matters
including appointment of a director as
authorized person to carry out various matters
on behalf of the company.
•Carry out valuation of shares for each of the
company.
•Prepare necessary schemes and papers
relating to amalgamation.

M&A: Legal Aspects: Companies
ACT
•File an application with the Court seeking approval /
directions of the Court.
•Call meetings of shareholders / creditors under
direction of the Court. Companies will also have to
issue necessary advertisements where required and
applicable.
•Hold the meetings, pass necessary resolutions
approving amalgamation and related matters.
•In parallel, Transferee Company may also hold on-
extra ordinary general meeting for matters such as
approval of issue of shares, increase of authorized
share capital. File special resolution with Registrar of
company.

M&A: Legal aspects: Companies
Act
•File report of chairman of the meetings
held under the courts directions within
the prescribed time.
•Petition to the court for sanctioning the
scheme of amalgamation.
•Give appropriate notice to Central
Government as required under Section
394 A.

M&A: Legal aspects: Companies
Act
•Obtain official Liquidator’s report that the
affairs of the company have not been
conducted in a manner prejudicial to the
interests of the members of the company or
the public interest.
•Obtain the order of amalgamation of the
court
•File certified copy of the order with Registrar
of companies within 30 days.
•Issue shares to the shareholders of the
transferee company and file necessary return
of allotment under Section 75.

M&A: Legal aspects: Companies
ACT
•Checklist for Acquisition and Divestiture of
Business:
•1. In case the acquirer is a company, check whether the
objects permit:
a) Acquisition of new business
b) Carrying on of the business sought to be
acquired.
• c) Investment in the shares.
•Check whether objects of Seller Company permit sale of
business.
•Ensure compliance under Section 293 (1) (a) in case of
sale of whole or substantially whole of the undertaking.

M&A:Legal aspects: Companies
Act
•Where the payment is to be made by issue of shares,
ensure compliance with the following by the company
proposing to issue such shares :
•Where the company is a public limited company,
Section 81 (1A) of the companies Act.
•Where target company is a listed company, provisions
relating to
•i) Listing agreement
•ii) SEBI Takeover code should be complied with
•Increase of Authorized Share Capital, where required,
needs compliance.
•Filing of return of allotment as required under Section
75 of Companies Act.

M&A: Legal Aspects: Companies
Act
•NCLT :National Company Law Tribunal :
Company law has been amended and NCLT is
proposed to be set up with powers of High Court
for approval of amalgamation and Corporate
Restructuring will be transferred to NCLT.
•Even powers of BIFR under Sick Industrial
Undertaking will also be transferred to NCLT.
•Govt is yet to notify constitution of NCLT and
operationalsing the provisions for that.

M&A :Legal aspects: SICA -1985
•SICA -1985 has been repealed and
powers to BIFR under SICA has been
transferred to NCLT.
•However NCLT is yet to be
operationalised. Till such time, BIFR under
SICA will continue to operate.

M&A : Legal aspects :SICA-1985
•Procedure under SICA:
•Reference to SICA by sick unit
•Declaration of unit as sick unit
•Appointment of operating agency.
•Operating agency to examine the viability
of sick unit and prepare rehabilitation
scheme (including amalgamation with
healthy unit)
•Hearing of Scheme

M&A:Legal aspects:SICA-1985
•Inviting objections to scheme before sanction.
•Hearing different agencies having interest in the
scheme
–Workers
–Government
–Creditors
•Sanction of the scheme
•Power to appoint Directors on the Board
•Monitoring by operating Agency
•Scheme will sanction various benefits in interest rates,
repayment period, income tax benefits, rationalization
of labour, deferment of government dues etc. as may
be recommended by operating agency.

M&A: Legal aspects: FEMA
•Issue of shares after merger or demerger or
amalgamation of Indian companies:
•Where a scheme of merger or amalgamation of
two or more Indian companies or a
reconstruction by way of demerger or otherwise
of an Indian company, has been approved by
courts in India the transferee company, or as the
case may be, the new company, may issue
shares to shareholders of the transferor
company, resident outside India, subject to the
following conditions:

M&A:Legal aspects: FEMA
•Percentage of shareholding of the
person resident outside India in the
amalgamated company does not exceed
the percentage specified in the approval
granted by the Central Government /
Reserve Bank, when it exceeds approval
of RBI should be obtained.

M&A: Legal aspects:FEMA
•Transferor Company or Transferee
(Amalgamated) company shall not engage in
agriculture, plantation, or real estate business
or trading in TDRs.
•Reporting to RBI: Amalgamated Company to
file details of shares held by person’s resident
outside India and furnishing confirmation that
all the terms and conditions stipulated by the
scheme have been complied with.
•Report to be submitted within 30 days of
issuing shares.

M&A: Legal aspects: Stamp duty
•Stamp duty is required to be paid as per
Laws of the State in which registered
office of the transferee company is
situated.
•In Maharashtra stamp duty is 10% of the
aggregate value of shares issued or
allotted in exchange or other wise and the
amount of consideration paid for such
amalgamation.

M&A: Legal aspects: Stamp duty
•However amount of duty chargeable will not
exceed:
•An amount equal to 7% of true market value of
immovable property located within the state of
Maharashtra of the transferor company
•An amount equal to 0.7% of aggregate of
market value of shares issued or allotted in
exchange or otherwise and the amount of
consideration paid for such amalgamation
whichever is higher of (i) or (ii).

M&A: Legal aspects: Competition
Act
•The Competition Act was passed in Parliament
•in 2002 and further amended in 2007 .
•The objective of the Act is to prevent practices
having adverse impact on competition,
•To promote and sustain competition in markets
•To protect interests of consumers and
•To ensure freedom of trade carried on by the
participants in markets.

M&A : Legal aspects: Competition
Act
•As a part of this objective business combinations
are to be regulated.
•The companies acquiring controlling interest by
way of amalgamation or acquisition are required
to notify to the competition commission such a
combination if the assets/ turn over of the
companies exceed threshold limits :
•The rules in this regard have been notified in
May 2011 to be effective from first June ,2011.

Competition Act –threshold
points
Assets
Total in India
Turn over
Total in India
Only in India No Group Rs.1500 Cr. Rs. 4500 cr.
Group Rs. 6000 cr. Rs. 18000 cr.
In and Out side
India
No Group US $ 750 M.
(Rs.500 cr.)
US $ 2250 M
Rs.1500 cr
Group US $ 3000 M US $ 9000 M

M&A: Legal aspects: Competition
Act
•Under the Act, the companies will have to notify
the deal with Competition commission and wait
for its approval.
•The amended act requires the Indian companies
to obtain pre deal approval for their overseas
acquisitions.
•Hence, Industry fears that the powers of
competition commission would work as major
hurdle in the global race for supremacy .

Competition Act
•The combinations that exceed the prescribed
threshold limits –pre merger - have to notify
the same mandatorily to the comprtition
commission within 30 days of the approval of
proposal by board of directors or execution of
any agreement or any other document.
•Proposed merger can not take effect for 210
days from the date it notifies the commission.

Competition Act
•The enterprise whose control, shares, voting rights
or assets are being acquired do not exceed Rs.
250 crores or turn over does not exceed Rs.750
crores are exempt from the provisions of notifying
to the commission for a period of five years.
•In case notifiable merger is not notified,
Competition commission can conduct an inquiry
within a year and if inquiry finds appreciable
adverse effect on competition, the Commission has
power to order demerger.

Competition Act
•The commission is also authorised to
impose fine which can extend to one
percent of turn over or total assets of the
combination whichever is higher , for failure
to notify the commission.
•However, if commission does not pass an
order within the period of 210 days, the
commission shall be deemed to have
approved the combination.

Competition Act
•The Commission , however, is required to
dispose off application within 30 days in
respect of combinations which , in the
opinion of commission do not have
potential to for appreciable adverse effect
on competition in the Indian markets.
•For other cases, commission will issue
show cause notice, conduct inquiry hold
hearing and give order within 210 days.

M&A : Legal aspects: Income Tax
•Various provisions of Income tax applicable to
Mergers and Acquisitions are summarized
below:
•Depreciation: Section 32
•The amalgamated company can continue to
claim future depreciation on the assets
transferred to it under scheme of amalgamation.
However, such depreciation be allowed on the
written down value of the assets before
amalgamation and not as the value of the
transferor of these assets.

M&A:Legal aspects: Income Tax
•Capital Gains: Section 45 and Section 47
•Transfer of Assets by an amalgamating
company to an amalgamated company
under the scheme of amalgamation is not
considered to be transfer for the purposes
of capital gains provided amalgamated
company is Indian company.

M&A: Legal aspects: Income Tax
•Expenditure on scientific Research,
Acquisition of patent rights or copy rights etc:
Section 35, Section 35A
•The amalgamated company can continue
to have the benefits of writing off of
expenditure on scientific research;
acquisition of patents and copy rights
which the amalgamating company could
not enjoy because of the amalgamated
company is an Indian company.

M&A:Legal aspects : Income Tax
•Set off and Carry forward of unabsorbed
depreciation and past losses: Section 72
•Unabsorbed depreciation and past losses
of the amalgamating company cannot be
carried forward by the amalgamated
company except as provided under
Section 72 (A).

M&A: Legal aspects: Income Tax
•Carry forward of losses in case of amalgamation scheme under
Section 72A
•This section permits the amalgamated company to carry
forward accumulated losses and unabsorbed
depreciation of amalgamating company subject to
following conditions:
•Amalgamating company is Indian company
•The Central Government on the recommendations of the
specified Authority is satisfied that :
•Amalgamating company is not financially viable
•Amalgamation is in public interest
•Amalgamation shall facilitate rehabilitation or revival of
the business of amalgamating company.

M&A: Legal aspects: Income Tax
•The benefit of carry forward would be available only
when following past amalgamation conditions are
fulfilled:
•Amalgamated company should continue to carry
forward business of amalgamating company without
any modification or reorganization except as permitted
by Central Government.
•The amalgamated company should along with the
return of income, furnish a certificate from the specified
authority to the effect that adequate steps have been
taken by the company to rehabilitation or revival of the
amalgamating company.

M&A: Legal aspects: Income Tax
•Meaning of De-merger:
•De-merger essentially means bonafide
separation of the key business assets and
reorganizing the business in such a
manner that though there is separation in
favour of another company, at least 75%
of the equity stake in two companies
continues to be common.

M&A: Legal aspects: Income Tax
•Section 2 (19AA) was introduced by Finance Act of
1999 defining De-Merger:
•De-merger means transfer in pursuance scheme of
arrangement under section 391 to 394 of the
companies Act by de-merged company of its one or
more undertakings to any resultant company
•In such a manner that:
•All the property of the undertaking of demerged
company immediately before demerger becomes the
property of resultant company.
•All liabilities relatable to the undertaking immediately
before demerger, becomes the liability of resultant
company.

M&A: Legal aspects: Income Tax
•Transfer of properties and liabilities is at book values.
•The resultant company issues its shares to the
shareholders of demerged company in consideration
of demerger on proportionate basis.
•Shareholders of not less than 75% of the value of
shares of demerged company become the
shareholders of resultant company.
•Transfer of undertaking is on a going concern basis
•De merger is in accordance with the conditions if any,
notified by Central Government under Section 72 A(5).

M&A: Legal aspects: Income Tax
•Slump Sale: Section 2 (42c):
•Means transfer of undertaking or unit or
division or business activity as a whole for
lump sum consideration without values
being assigned to individual assets and
liabilities. Profits or gains arising from
slump sale shall be chargeable as long
term capital gain.

Key Steps to Successful Post
Acquisition Management
Normal Co. Mgt.
Inadequate tactical
preparation
Wait and
See
No Special
communication
effort
Half hearted
integration
Dropping profit
& dis-
satisfaction
Experienced
Integrators
Very clear Initial
ideas
Immediate
Actions
Continuous
Communication
Determined
follow through
Realistic
objectives met

M&A: Post Merger Scenario
Strategy Ground Result

a) Desire to move an acquisition policy or
“aggressive acquisition policy”.
a) A policy of this kind begets unrelated
and messy situation that lead to
“Conglomerates” at best and at worst a de
stabilitating complexity that can be lethal.

b) Desire to acquire new technology
hitches, more regulatory approvals all
combined to keep prize out of reach. In
many cases the previous owners sold out
as a means to resolving this problem.
b) More investment, more details to be
resolved, unforeseen technical
c) Attractive past experience c) Purchase of obsolete concept-
particularly past performance of aging
firms.

d) Quest for complementarity’s d) Synergy may be illusory and may drive
away the company from their core business
to related but highly dangerous area.

e) Inability to walk away e) Once negotiations start, desire increases.
Nothing seems to deter buyer.
Price increases absorbed.

Post Merger Scenario
•Jack Welch : Avoid Seven pitfalls for
successful M&As :
•1. Believing that a merger of equals can
actually occur. Despite the noble
intentions of those attempting them, the
vast majority of mergers of equals self
destruct because of their very premise.

Post Merger Scenario
•2. Focusing so intently on strategic fit that
you fail to assess cultural fit, which is just
as important to merger’s success if not
more so.
•3.Entering into ‘ reverse hostage situation’
in which the acquirer ends up making many
concessions during negotiations that the
acquired ends up calling all the shots
afterward.

Post Merger Scenario
•4.Integrating too timidly . With good
leadership, merger should be complete
within ninety days.
•5.The conqueror syndrome, in which the
acquiring company marches in and installs
its own managers everywhere, undermining
one of the reasons for the merger – getting
an influx of new talent to pick from.

Post Merger Scenario
•6. Paying too much. Not 5 or 10 percent too
much but so much that the premium can
never be recouped in the integration.
•7. Resistance from the acquired company’s
people – from top to bottom. In a merger,
new owners will always select people with
buy-in over resisters with brains. If you want
to survive, get over your angst and learn to
love the deal as much as they do.

M&A: Post Merger scenario
•Strategic Imperative:
•The first priority for successful acquisition
implementation is to know precisely what you are
buying and what are you going to do if and when the
deal is completed.
•Valid strategy for successful acquisition policy:
•To obtain presence for core business.
•To leverage marketing: Applying a massive marketing
capability to a good product line is an excellent base
for an acquisition strategy.
•To build an enlarged base
•To reposition the business

M&A : Post Merger Scenario
•Drucker's five commandments for
successful acquisitions
–The acquirer must contribute something to the
acquired company
–Common core of unity is required.
–Acquirer must respect the business of acquired
company
–Within a year or so, acquiring company must be
able to provide top management to the acquired
company.
–Within the first year of merger, management's in
both companies should receive promotions across
the entities.

M&A :Post Merger Scenario
•Weston's Commentary on Drucker’s Pentalogue
–Relatedness is a necessary requirement, but complimentary
is an even greater virtue.
•E.g.: Combining a company, strong in research but
weak in marketing with a company strong in marketing
but weak in research may bring blessings to both.
–Relatedness or complementarities apply to general
management functions such as research, plants control and
financial manager as well as firm specific operations of
production and marketing.
–Thus companies with cash flows or managerial capabilities in
excess of investment opportunities could effectively combine
with companies lacking in financial or managerial resources to
make the most of the prospects for growth and profits in their
industries.

M&A: Post Merger Scenario
•An acquiring firm will experience
negative results if it pays too much. It is
difficult to accurately evaluate another
organization. There can be great
surprises on both sides after marriage.
Expectation that a firm can improve
average risk return relationship in an
unfamiliar market or industries is likely to
be disappointed.

M&A:Post Merger Scenario
•Golden Rules of Integration
–Plan First: If you don't know what you are going to
do, don't do it.
–Implement quickly: If you are going to do it, do it
immediately.
–Communicate frankly: Cost of error is always on the
side of inadequate communication. A change of
plan can always be explained or admitted, with less
adverse effect on morale and hence productivity,
than a policy of silence.
–Sensitivity in the treatment of people, recognition of
long service and proper and generous separation
arrangements all count here.

M&A:Post Merger Scenario
•What constitutes Success?
•Meeting the objectives:
•Most companies define success as meeting their acquisition
objectives. In the case of combined or integrated companies, this
normally included such quantitative criteria as:
•Earning per share
•Profit before tax
•Revenue growth
•Return on assets employed
•Increase in Market share
•Increased in productivity
•Realization of synergy by reaping benefits of economies of scale:
reduction inn expenses of cost of operation.

M&A:Post Merger Scenario
•Enhanced shareholder value:
•Some experts argue that real criterion is
not financial data but enhanced
shareholder value over a long period.
•Shareholder values appreciation in value
of share price.
•Hence, increase in value of shares is
perceived as increase in shareholder
value.

M&A: Post Merger Scenario
•But what are the results of various studies?
•SUMMARY OF KPMG GLOBAL REPORT ON MERGERS &
ACQUISITION
•Research conducted in : June 1999
•Sample : 700 M & A deals between 1996 and 1998
•Research Objectives:
•To correlate specific actions with success or failure of transactions
•To investigate relative importance of different activities
•To asses respondents’ approaches and attitudes to cultural and
people issues.
•Bench marking for success; Shareholder value was used as the
basis of the benchmark by which respondents’ deals were
measured

M&A: Post merger scenario
»Objective measure of success in unlocking
shareholder value:
•Deals added Value : 17%
•Deals produced no Discerninible value
: 30%
•Deals destroyed Value : 53%
•In other words, deals failed:83%

M&A : Post Merger scenario
»Merger motives:
•New geographical markets : 35%
•Maximise Share holder value :
20%
•Increase / Protect market share: 19%
•Acquire new product / service :
8%
•Gain control over supply chain :
7%
•Other : 11%

M&A : Post Merger Scenario
»Six Keys to success:
•3 Hard keys
•- Synergy evaluation
•- Integration Project Planning
•- Due Diligence
•3 Soft Keys
•- Picking Management Team
•- Resolving Cultural Issues
•- Communication

M&A: Post Merger Scenario
•Key areas targeted for synergies:
•Revenue benefits : 36%
•Direct operational Cost reduction:39%
•Indirect overhead cost reduction: 9%
•Others :16%

M&A : Post Merger Scenario
•Success Rate of Different Hard and Soft Keys:
•- Picking Management Team :26%
•- Integration Project Planning :13%
•- Picking Management Team
and Integration Project Planning: 66%
•- Communication : 13%
•- Synergies : 27%
•- Communication and synergies : 45%

M&A: Post Merger Scenerio
•CONCLUSION :
•Too often, when planning and implementation of
M & A deal, companies concentrate on hard
mechanics of value extraction. This is necessary
but by itself will not be enough. However
intensive the planning, however innovative the
financing, and however, watertight the contract,
it is the people that will be key in implementing
the mechanics of value extraction. Softer issues
can not be left to chance.

M&A : Post Merger Scenario
•In the survey companies that moved beyond
mere lip service and made a concerted effort to
priorities their people were rewarded with a far
greater likelihood of deal success.
•On the other hand, communication may well be
clear, staff motivated – but if the fundamental
mechanics are flawed, and the framework is
faulty, value extraction will prove elusive.
•Therefore there has to balanced and integrated
approach. A balance between the soft and hard
will be essential to successfully deliver
shareholder value.

M&A: Post Merger scenario
•Post Merger Integration
•Seven Rules by Max Habeck – Fritz & Michael
Tram
• 1.Vision:
•Guide post merger Integration with a clear and
realistic vision derived from through business
due diligence.
•Research Findings:
–78% of mergers are mistakenly driven by fit, and not
vision.
–Around 58% of mergers fail.

M&A ; Post Merger Scenario
•Define What You Have To Do:
•Assess not only what you possess in terms of competitive
advantages, research capabilities, and other resources but what
your partner can do as well. This knowledge comes form business
due diligence which is market oriented, not just finance oriented.
•Define Where You Want To Go:
•What markets do you want to be active in? Where can you bring the
combined abilities of your new organization to bear, and in the
process create something new and powerful?
•Remain Realistic:
•Credibility and clarity are crucial to creation of bold vision. A
statement which is unclear or unrealistic will not generate
enthusiasm and will not be followed.

M&A: Post Merger Scenario
•Don’t Copy Or Co-Opt:
•Best vision can not be transferred like labels from one company to another.
There must be something which company’s employees and customers can
uniquely identify, based on the credibility and clarity of the statement.
•Communicate Constantly:
•Visions live. Whether you call them a touch stone or acid test, they serve as
a control and a check on all major or minor – moves your new organization
may take. Proper and continual communication through out the organization
will prompt your employees ask themselves:” Is that us? “Is that what we
really want to do?”, When they take decision.
•Let “Fit” Follow:
•If you have followed guidelines above, it seems only natural that the issues
fit in all their various forms – from financial to strategic should follow from
the overall vision. Trying it other way around does not work.

M&A: Post Merger Scenario
•M & A Cases That Have Failed On Account Of Lack Of Vision
Or Unrealistic Vision:
•AT & T and NCR:
•In the late 1980s American Telephone and Telegraph still had
assets such as Bell Labs to go with long distance telephone
services it kept after the 1984 anti trust break up. The company had
a grand vision of a technological synergy between its expertise in
telecommunications and NCR’s expertise in computer technology.
•After years of intense searching, hampered by management
changes as well as cultural frictions, no synergies were found. The
presumed fit between telecommunication equipment and computer
hardware failed to turn up.
•AT &T spun off the remains of NCR around five years later at a loss
of around $ 3.5 billion, nearly half of what it initially paid.

M&A: Post Merger scenario
•Sony Pictures:
•Sony acquired Columbia Pictures in 1989 for $ 5 billion.
However, Columbia had difficulties in generating the
successful software to begin with. Rapidly rising salaries
of stars and lack of success at box office culminated in
Sony making operating loss of around $ 500 million. The
company wrote off $ 2.7 billion. The losses were
attributed to abandonment of large number of projects
and settlement of outstanding lawsuits.
•However, instead of divesting the unit, Sony made
management changes and imposed stricter controls.
Columbia is now a part of Sony Pictures Entertainment,
which represented just fewer than 10% of Sony Group’s
Worldwide Sales of around $ 50 billion.

M&A: Post Merger Scenario
•2.Leadership – It’s Critical Establish It
Quickly
•Research Findings:
–Leadership’s urgency is often neglected. Some 39%
of all companies faced a leadership vacuum
because they failed to make the establishment of
leadership a priority.
–A merger without strong leadership in place from its
early days will drift quickly and drift is deadly.

M&A: Post Merger Scenario
•What You Have To Do:
•Decisively Put A Leadership Blue Print In Place Prior To
Closing The Deal:
•Leadership patterns have to be communicated, understood and
accepted.
•Keep The Keepers:
•The top managerial talent in the combined organization should have
already been identified in your business due diligence. Whether you
can simply convince them to stay or whether you need “Golden
Handcuffs”, you need to lock in the top talent immediately.
•Act As Quickly As Your Situation Dictates:
•The key word here is “speed”. Throw out the old time table, this call
for a specific feel for timing.

M&A:Post Merger Scenario
•Case Of Merger Which Have Failed due to
Leadership Issue:
•Monsanto & American Home Products:
•In June 1998, Monsanto and American Home
Products unveiled $ 35 billion merger plan which
on surface had plenty to offer both companies.
The deal would have combined Monsanto’s
pipeline of biotechnology with marketing
strength of AHP. The merger fell through due to
power struggle between Monsanto CEO Robert
Shapiro and his counterpart at AHP, John
Stafford.

M&A : Post merger scenario
•3.Growth: Merge To Grow, Focus On Added
Value & Not On Efficiency Synergies
•Research Findings:
•76% of the companies surveyed focused too
heavily on “efficiency” synergies. 30% of the
companies virtually ignored attractive growth
opportunities such as cross selling possibilities
or knowledge sharing in research and
development.

M&A: Post Merger Scenario
•What You Have To Do:
•Begin Capturing Growth Synergies As Early And As
Quickly As Possible:
•Growth opportunities should follow directly from long
term, growth – oriented, “one business” vision. There are
usually growth synergies i.e., potential to increase sales
quickly in customer, product and /or geographic
segments. These complement the savings potential in
shared processes and procurement.
•Prioritize Areas Of Cost Savings:
•Your due diligence work, combined with benchmarking,
should reveal where the efficiency synergies are located.
Find them, prioritize them and realize them.

M&A :Post Merger Scenario
•Synergy Suicide - Cost Reduction Is Not A Driving Force:
•Wells Fargo & Co / First Interstate Bancorp:
•These two competitors merged in $ 11.3 billion transaction in 1996,
to realize efficiency synergies of $800 million from saving
operating costs. These were achieved in part by reducing work
force by 20%. Wells Fargo also discovered considerable saving
potential in information technology. Wanting to move quickly, it set a
deadline of only seven months for integrating the computer system
at all First Interstate Bancorp branches. It nearly reached the goal,
but the efforts harmed internal and customer relationships. The
company later attributed a decline in operating profit to back office
problems resulting from the first Interstate integration.

M&A: Post Merger Scenario
•Most Successful Growth Through Mergers:
•Cisco Systems:
•This fortune 500 company has grown since its founding
in 1984, thanks to a combination of organic growth and
successful integration of 25 acquisitions. Cisco has
almost quadrupled its revenue since 1995 to $ 8.5 billion
and its net income tripled to $ 1.3 billion. It holds a
market share of around 80% routers and switches which
form the internet infra structure.
•Making mergers is and will continue to be absolutely
essential for Cisco to maintain its rapid growth and
enhance its competitive advantages.

M&A :Post Merger scenario
•4.Early Wins : Act, Get Results &
Communicate – Make Tangible, Positive
Moves :
•Research Findings:
–Very few companies attempt to achieve early wins
in an external or outward looking area, such as in
their relationship with suppliers or customers.
–61% of the merged companies search for early wins
in the wrong place by focusing on job shedding,
factory closings or other inward looking cost moves.
The emotion attached to such moves can back fire
and quickly turn them into early losses.

M&A : Post Merger Scenario
•What You Have To Do:
•Do Your Due Diligence:
•You can only get early wins if you have done your due
diligence properly.
•Design Early Wins According To The Buy-In Needs:
•You need the sensitivity to know what you need and
what your situation is, to identify more precisely where
you should look and to determine how substantial a
move you should make. In this case, it is better to err on
safer side of something small and manageable.

M&A: Post Merger Scenario
•Look Internally, But Above All Look External:
•Early wins in outward looking areas such as customers and
suppliers can have a high impact, but are often neglected at the
expense of internal focused early wins.
•Focus On Assets, Customers And Knowledge:
•These are rich sources of early wins.
•Get Cost Cutting Out Of The Way As Quick As Possible:
•But do not sell these as early wins.
•Gather Information By Asking And Listening:
•This gets constituencies involved.
•Communicate Complete Tasks Quickly:
•But without any exaggeration

M&A : Post Merger Scenario
•5. Cultural Differences: Handle A “Soft
Issue With Hard Measures”:
•
•Cultural imposition is not always the option. It
is often more suitable to compound the
cultures or even let them remain separate.
•Research Finding:
–It is common to blame cultural differences when
merger fail.
–Cultural imposition is the norm.

M&A :Post Merger Scenario
•What You Have To Do:
•Develop The Strategy For Cultural Integration Before
Merger:
•Decide if you are going to impose one of the cultures
leave them separate, or create a compound culture.
Before imposing culture be sure that the new culture is
better than the one it replaces.
•Put The Leadership Team In Place Quickly:
•Minimize uncertainty and a cultural “void” the leadership
team must behave as a cohesive group.

M&A : Post Merger Scenario
•Perform Through Cultural Assessment:
•Understand the differences between two cultures,
identify potential barriers and misunderstandings.
Legitimize and discuss the differences. Include
organizational system such as HR, reporting and IT in
this assessment.
•Decide What You Want The New Culture To Be:
•If you are creating a compound culture, define what you
want the new culture to be and why actively encourage
the emergence of something entirely new which builds
on the strengths of both partners.

M&A : Post Merger Scenario
•Build Links Between The Two Organizations:
•There is nothing like working together to build
understanding.
•ANCHOR NEW CULTURE THROUGH A CULTURAL
CURRENCY:
•Set up a system of incentives and penalties to enforce
and encourage the new norms and processes. Make
sure the new leadership team acts as role models to
continually reinforce the desired level of behaviour. Deal
firmly with people who try to undermine the new
direction.
•Have Patience
•It takes time for people to adjust to a new cultural reality.

M&A : Post Merger Scenario
•6. Communication: Real Force Behind Buy In,
Orientation And Expectations: Plan Your
Communication According To Timing And Target,
Get Word Out, And Actively Obtain Feed Back:
•Research Findings:
–86% of companies said they failed to communicate their new
alliance sufficiently in their merger integration plan.
–Most commonly cited barrier to merger integration is “failure to
achieve employee commitment”. Some 37% of respondents
cited this as the primary obstacle to overcome, well ahead of
obstructive behaviour and culture barriers.

M&A : Post Merger Scenario
•Remember That You Are Always Communicating:
•“Non communication “is still communication because it sends
messages you are just not in control of what the messages are, and
the grapevine will decide. The grapevine is the single most effective
communications medium in your company. Give it good reasons to
circulate positive messages.
•Follow A Framework To Help You Manage The Complexity:
•Understand all your stakeholders, know your own communication
goals, write a plan, craft messages positively and effectively, pick
appropriate media. Then actively obtain feedback to know when you
have achieved your goals. Set high standards and make sure you
have channels of access.
•Check your commitment to your message and your ability to
communicate it consistently, firmly and honestly.

M&A : Post Merger Scenario
•What You Have To Do
•Recognize That All Your Merger Goals Depend On
Communication:
•You have to persuade other people to believe in your
vision and to act to bring it about. This is a
communication task, pure and simple.
•Know Your Communication Goals:
•At all times, with all stock holders, be consciously aware
of your own goal for the communication. This also
involves knowing your constituencies, including
employees, unions, investors, customers, suppliers, the
financial community, the local and state governments.

M&A : Post Merger Scenario
•Be Flexible:
•Use all your skills to make the best choices about how to
communicate most effectively. Use more than one
medium and be prepared to change how you
communicate whenever necessary.
•Listen
•Use whatever method you can to understand whether
you have achieved your communication goals. Dialogue
is the richest form of feed back, but it is certainly not the
only one. Indirect indicators such as personal behavior,
levels of absenteeism and of course, share price – also
tell you how your message has been heard.

M&A : Post Merger Scenario
•7. Risk Management: Be Proactive, Not
Reactive. Prioritize Projects, Then Identify,
Categorize and Embrace Risks And Do It
Continuously.
•Research Findings:
• 32% of merging companies actively pursue
formal risk management. Some of these
employ risk management so efficiently that it
has become a source for both early wins and
long term growth.

M&A : Post Merger Scenario
•What You Have To Do:
•Assess Your Situation:
•Then priorities your post merger
integration projects according to their
business criticality and their complexity.
•Derive The Risks Inherent In Your
Projects:
•By making assumptions regarding those
issues

M&A : Post Merger Scenario
•Categorize Your Risks:
•According to “high, medium, low” Pin point the
showstoppers which can spell death to your merger
plans.
•Vigorously Attack Those Risks You Can Overcome:
•Minimize the importance of the ones which are not as
easily and quickly overcome.
•Monitor Process Diligently:
•Repeat it from the beginning on a regular basis. Every
move you make changes your internal circumstances
and your external circumstances are constantly changing
as well. This is fluid, dynamic process, not a one time
solution.

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Mergers & Acquisitions Complete explanation1).ppt