MERGERS AND ACQUISITION – 1

Introduction

Mergers, Amalgamations & Takeovers all through the globe have become universal practices in the corporate world covering different sectors within the nations and across their borders for securing survival, growth, expansion and globalisation of the enterprise and achieving multitude of objectives.

Meaning of terms

Mergers, consolidation, takeovers, amalgamations, acquisitions, combinations, restructuring and reconstructing are some of the terms which are required to be understood in the sense these are used. In different circumstances some of these terms carry different meanings and might not be constructed as merger or takeover in application of these sense underlying the term for a particular situation. In the following paragraphs, the meaning of these terms have been explained in the light of the definition and explained in the light of the definitions and explanations given by eminent scholars and practitioners in their works.

1. Merger

Merger is defined as combination of two or more companies into a single company where one survives and the others lose their corporate existence. The survivor acquires the assets as well as liabilities of the merged company or companies. Generally, the company which survives is the buyer which retains its identity and the seller company is extinguished. Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and stock of one company stand transferred to transferee company in consideration of payment in the form of equity shares of transferee company or debentures or cash or a mix of the two or three modes.

2. Amalgamation

Ordinarily amalgamation means merger

Halsbury’s Laws of England describe amalgamation as a blending of two or more existing undertaking into one undertaking, the shareholders of each blending company becoming substantially the shareholders in the company which is to carry on the blended undertaking.

Andhra Pradesh High Court held in S.S. Somayajulu v Hope Prudhomme & Co. the word “amalgamation” has no definite legal meaning. It contemplates a state of things under which two companies are so joined as to form a third entity, or one company is absorved into and blended with another company. Amalgamation does not involve a formation of a new company to carry on the business of the old company.

Madras High Court held in W.A. Beardsell & Co. (P) Ltd. the world ‘amalgamation’ has not been defined in the Act. The ordinary dictionary meaning of the expression is

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“combination”. Judging from the context and from the marginal note of section 394, which appears in Chapter V relating to arbitration, compromise, arrangements and reconstructions, the primary object of amalgamation of one company with another is to facilitate reconstruction of the amalgamating companies and this is matter which is entirely left to the body of shareholders of the primary company which offers or intends to amalgamate with another. There is indeed an absorption by the company with which it is amalgamated, the latter being statutorily called the transferee company and the former the transferor company. In fact, the company amalgamating and the company with which it is amalgamated are so statutorily defined under section 394(1) (b) of the Companies Act, 1956. On a prima facie examination of the relevant provisions in Chapter V, it is abundantly clear that it is essentially an affair relating to the internal administration of the transferor company. Of course, there should be consensus ad litem between the transferor company and the transferee company. The initiative thus lying on the shoulders of the transferor company, it is obligatory that a scheme or arrangement should be proposed by that company and the shareholders put on notice of such intendment and objects, and they being informed of the benefits, facilities and privileges attendant upon such an obligation. Thus, amalgamation being within the scope of the decision of the body of the shareholders, such a decision if made by the body unanimously ought not to be lightly interfered with by Court.

The Companies Act, 1956 vide sections 394 and 396A explains amalgamation which will be discussed separately under Legal Aspects of Merger. However, the term will be used interchangeably with “merger” wherever the circumstances would so require.

3. Consolidation

Consolidation is known as the fusion of two existing companies into a new company in which both the existing companies extinguish. Thus, consolidation is mixing up of the two companies to make them into a new one in which both the existing companies lose their identity and cease to exist. The mix-up assets of the two companies are known by a new name and the shareholders of two companies become shareholders of the new company. None of the consolidating firms legally survives. There is no designation of buyer and seller. An consolidating companies are DOSSOLVED. In other words, all the assets, liabilities and stocks of the consolidating companies stand transferred to new company in consideration of payment in terms of equity shares or bonds or cash or combination of the two or all modes of payments in proper mix.

4. Combination

Combination refers to mergers and consolidations as a common term used interchangeably but carrying legally distinct interpretation. All mergers, acquisitions, and amalgamations are business combinations. Types of business combination are discussed in the following paragraphs.

5. Holding company

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mergers and consolidations are distinct business combination which differ from a holding company. The relationship of the two companies when combine their resources are differently known as parent company which holds the equity stock of the other company knows as subsidiary and controls its affairs.

Section 4 of the Companies Act, 1956 defines the ‘holding Company’ and ‘subsidiary’ which is quite relevant in the present context. The main criteria of becoming holding company is the control in the composition of the Board of Directors in another company and such control should emerge from holding of equity shares and thereby more than 50% of the total voting power of such company.

6. Acquisition

Acquisition in general sense is acquiring the ownership in the property.

In the context of business combinations, an acquisition is the purchase by one company of a controlling interest in the share capital of another existing company. An acquisition may be affected by (a) agreement with the persons holding majority interest in the company management like members of the board or major shareholders commanding majority of voting power; (b) purchase of shares in open market; (c) to make takeover offer to the general body of shareholders; (d) purchase of new shares by private treaty; (e) acquisition of share capital or one company may be either all or any one of the following form of considerations viz. means of cash, issuance of loan capital, or insurance of share capital.

7. Takeover

A ‘takeover’ is acquisition and both the terms are used interchangeably.

Takeover differs from merger in approach to business combinations i.e. the process of takeover, transaction involved in takeover, determination of the share exchange or cash price and the fulfilment of goals of combination all are different in takeovers than in mergers. For example, process of takeover is unilateral and the offeror company decides about the maximum price. Time taken in completion of transaction is les in takeover than in mergers, top management of the offeree company being more co-operative.

8. Reconstruction

The term ‘reconstruction’ has been used in section 394 alongwith the term ‘amalgamation’. The term has not been defined therein but it has been used in the sense not synonymous with amalgamation.

In the Butterworth publication, the term has been explained as under:

“By a reconstruction, a company transfers its undertaking and assets to a new company in consideration of the issue of the new company’s shares to the first company’s members and, if the first company’s debentures are not paid off, in further consideration of the new

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company issuing shares or debentures to the first company’s debenture holders in satisfaction of their claims. The result of the transaction is that the new company has the same assets and members and, if the new company issues debentures to the first holders as the first company, the first company has no undertaking to operate and is therefore usually wound up or dissolved.”

Reconstructions were far more common at the end of the last century and the beginning of this century than they are now. The purposes to be achieved by them were usually on of the following: either to extend or alter the objects of a company by incorporating a new company with the wider or different objects desired; or to alter the rights attached to different classes of a company’s shares or debentures by the new company issuing shares or debentures with those different rights to the original company’s share or debenture holders; or to compel the members of a company to contribute further capital by taking shares in the new company on which a larger amount was unpaid than on the shares of the original company.

The first two of these purposes can now be achieved without reconstruction and the third is now regarded as a species of coercion, which is strongly disapproved of by the courts and is not pursued in practice. Consequently, reconstructions for these reasons do not now occur.

In Indian context, the term would cover various types of arrangements or compromises which may include merger as well as demerger.

9. Restructuring

The term “restructuring” is used in the corporate literature for mergers and amalgamations. The term should carry the same meaning as reconstruction as explained above.

In American literature the term finds mention in the sense of “industrial restructuring”. Edword J. Blakely a professor at University of California, Berkeley in a jointly written paper alongwith Philip Shapira in Annals has discussed the ‘industrial structuring’ taking place in American economy particularly the manufacturing sector being recognised and deindustrialised through changing location of capital investments, use of superior technologies and displacement of labour, etc. with objectives to maintain profitability for large corporations.

The above position was observed during 1980s in developed countries but now in 1990s, the above elements of industrial restructuring are being observed in India’s industrial economy, in many industries where computerisation and use of modern technology is being inducted.

10. Demerger or corporate splits or division

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Demerger or split or division of a company are the synonymous terms signifying a movement in the company just opposite to combination in any of the forms defined above.

Such types of de-mergers or ‘divisions’ have been occurring in developed nations particularly in UK and USA.

In UK, the above terms carry the meaning as a division of a company takes place when part of its undertaking is transferred to a newly-formed company or to an existing company, some of all of whose shares are allotted to certain of the first company’s shareholders. The remainder of the first company’s shareholders. The remainder of the first company’s undertaking continues to be vested in it and its shareholders are reduced to those who do not take shares in the other company; in other words, the company’s undertaking, and shareholders are divided between the two companies.

In USA, too, the corporate splits carry the similar features excepting difference in accounting treatment in post-demerger practices.

In India, too, demergers and corporate splits have started taking place in old industrial conglomerates and big groups which are discussed in detail under a separate head.

Mergers and takeovers

The terms ‘merger’ and ‘takeover’ shall be used in this report interchangeably so far as the valuation techniques and academic orientation are concerned but the other aspects will be supported with explanations about the different routes the companies follow in embracing the business combinations through takeover or merger.

Purpose of merger and acquisition

The company which proposes to acquire another company is knows differently in different modes of acquisition, the familiar ones are; ‘predator, offeror, corporate raider (for takeover bids), etc. The transferee company is also denoted as victim, offeree, acquire or target etc.

The purpose for an offeror company for acquiring another company shall be reflected in the corporate objective. It has to decide the specific objectives to be achieved through acquisition. The basic purpose of merger or business combination is to achieve faster growth of the corporate business. Faster growth may be had through product improvement and competitive position i.e. enhanced profitability through enhanced production and efficient distribution of goods and services or by expanding the scope of the enterprise through “empire building” through acquisition of other corporate units. Other possible purposes for acquisition are shortlisted below:

1. Procurement of supplies

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to safeguard the source of supplies of raw material or intermediary product; to obtain economies of purchases in the form of discount, savings in transportation

costs, overhead costs in buying department, etc. to share the benefits of suppliers economies by standardising the materials.

2. Revamping production facilities

to achieve economies of scale by amalgamating production facilities through more intensive utilisation of plan and resources;

to standardise product specifications, improvement of quality of product, expanding market and aiming at consumers satisfaction through strengthening after sale services;

to obtain improved production technology and know how from the offeree company to reduce cost, improve quality and produce competitive products to retain and improve market share.

3. Market expansion and strategy

to eliminate competition and protect existing market; to obtain new market outlets in possession of the offeree; to obtain new product for diversification or substitution of existing products and to

enhance the product range; strengthening retail outlets and sale depots to reationalise distribution; to reduce advertising cost and improve public image of the offeree company; strategic control of patents and copyrights.

4. Financial strength

to improve liquidity and have direct access to cash resources; to dispose of surplus and outdated assets for cash out of combined enterprise; to enhance gearing capacity, borrow on better strength and greater assets backing; to avail of tax benefits; to improve EPS.

5. General gains

to improve its own image and attract superior managerial talents to manage its affairs;

to offer better satisfaction to consumers or users of the product.

6. Own developmental plans

The purpose of acquisition is basked by the offeror company’s own development plans.

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A company thinks in terms of acquiring the other company only when it has arrived at its own development plan to expand its operations having examined its own internal strength where it might not have any problem of taxation, accounting valuation, etc. but might feel resources constraints with limitation of funds and lack of skilled managerial personnel. It has to aim at a suitable combination where it could have opportunities to supplement its funs by issuance of securities, secure additional financial facilities, eliminate competition and strengthen its market position.

7. Strategic purpose

The Acquirer Company views the merger to achieve strategic objectives through alternative type of combinations which may be horizontal, vertical, product expansional, market extensional or other specified unrelated objectives depending upon the corporate strategy. Thus, various types of combinations distinct with each other in nature are adopted to pursue this objective like vertical or horizontal combination.

8. Corporate friendliness

Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite competitiveness in providing rescues to each other from hostile takeovers and cultivate situations of collaborations sharing goodwill of each other to achieve performance heights through business combinations. The combining corporate aim at circular combinations by pursuing this objective.

9. Desired level of integration

Mergers and acquisitions are pursued to obtain the desired level of integration between the two combining business houses. Such integration could be operational or financial. This gives birth to conglomerate combinations.

The purpose and the requirements of the offeror company go a long way in selecting a suitable partner for merger or acquisition in business combinations.

Types of Mergers

Merger or acquisition depends upon the purpose of the offeror company it wants to achieve. Based on the offerors objectives profile combination could be vertical, horizontal, circular and congromeratic as precisely described below with reference to the purpose in view of the offeror company.

1. Vertical Combination

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A company would like to takeover another company or seek its merger with that company to expand espousing backward integration to assimilate the sources of supply and forward integration towards market outlets. The acquiring company through merger of another unit attempts on reduction of inventories of raw material and finished goods, implements it production plans as per objectives and economises on working capital investments. In other words, in vertical combinations, the merging undertaking would be either a supplier or a buyer using its product as intermediary material for final production.

The following main benefits accrue from the vertical combination to the acquirer company i.e. (1) it gains a strong position because of imperfect market of the intermediary products, scarcity of resources and purchased products; (2) has control over product specifications.

2. Horizontal combinations

It is a merger of two competing firms which are at the same stage of industrial process. The acquiring firm belongs to the same industry as the target company. The main purpose of such mergers is to obtain economies of scale in production by eliminating duplication of facilities and operations and broadening the product line, reduction in investment in working capital, elimination of competition concentration in product, reduction of advertising costs and increase in market segments and exercise of better control on market.

3. Circular Combination

companies producing distinct products seek amalgamation to share common distribution and research facilities to obtain economies by elimination of cost of duplication and promoting market enlargement. The acquiring company obtain benefits in the form of economies of resource sharing and diversification.

4. Conglomerate Combination

It is amalgamations of two companies engaged in unrelated industries like DCM and Modi Industries. The basic purposes of such amalgamations remains utilisation of financial resources and enlarge debt capacity through re-organising their financial structure so as to service the shareholders by increased leveraging and EPS, lowering average cost of capital and thereby raising present worth of the outstanding shares. merger enhances the overall stability of the acquirer company and creates balance in the company’s total portfolio of diverse products and production processes.

5. within Stream Mergers

Such mergers take place when subsidiary company merges with parent company or parent company merges with subsidiary company. The former arrangement is called “down stream” merger whereas the latter is called ‘up stream’ merger. For example, recently, the ICICI Ltd. a parent company has merged with its subsidiary ICICI Bank signifying down stream merger. Such mergers are very common in the corporate world. Another instance of

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up stream merger is the merger of Bhadrachalam Paper Board, subsidiary company with the parent ITC Ltd. and likewise.

6. Objectives of takeover or merger

Takeover or merger, in practice, depends upon the motives of the persons behind such move. They adopt according to their convenience the route which leads to attaining their goal of acquiring the controlling interest in the voting rights or the assets in part or in whole of the target company. Generally, the following types of decisions limit their choice for a particular firm in which takeover or merger activity could be organised:

(a) acquisition of shares in the target company;(b) acquisition of the assets of the target company’s undertaking;(c) acquisition for full or part ownership of the target undertaking;(d) acquisition for cash or for shares or other securities of the offeror company or

combination of cash and variety of securities.(e) attitude of offeror company towards its own shareholders for availing of the tax

relief under the tax-laws for income, capital gains, exemptions in stamp duty, corporations tax, etc.;

(f) possibilities of friendly acquisition and the percentage of shareholding in target company available through persons agreeable to merger or takeover;

(g) attitude of the management (board) of the offeror company to have exclusive control of the affairs of the target company on acquisition or share the management of combined company with the direction of the target company;

(h) legal formalities to be compiled with under various corporate laws the provisions of which are attracted in effecting takeover or merger of the two or more companies;

(i) means of finance available with offeror company to pay off for the acquisition of shares, loan, stocks or assets of the target company;

(j) the types of securities available with target company for acquisition and their possible adjustment in the capital structure of the combined company particularly of the loan stock convertible securities, warrants, options or subscription rights outstanding which require appropriate arrangements to be made by the offeror.

(k) involvement of financial institutions and banks as lenders of long-term finance and stake in the equity capital of the target company, the chances of obtaining their approval and also availing of further finance from them for the combined company.

(l) valuation of shares of target company, valuation of shares of combined company;

(m) favourable features in the Memorandum and Articles of Association of the two companies with powers of the Board to go for acquisition for offeror company and to get for sale of undertaking for the offeree company through takeover or merger, etc.;

(n) future plans of the combined company towards its business.Reasons for merger or takeover

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There is not one single reason for a merger or takeover but a multitude of reasons cause mergers and acquisitions which are precisely discussed below:

(1) Synergistic operating economies

It is assumed that existing undertakings are operating at a level below optimum. But when two undertakings combine their resources and efforts they may with combined efforts produce better results than two separate undertakings because of savings in operating costs viz. combined sales offices, staff facilities, plants management, etc. which lower the operating costs. Thus, the resultant economies are know as synergistic operating economies. The worth of the combined undertaking should be greater than the sum of the worth of the two separate undertakings i.e. 2+2 = 5.

Synergy means working together. The gains obtained by working together by amalgamated undertakings result into synergistic operating gains. These gains are most likely to occur in horizontal mergers in which there are more chances for eliminating duplicate facilities. Vertical and conglomerate mergers do not offer these economies.

Among others, synergy is possible in areas viz. production, finance and technology. Merger of Hindustan Computers, Hindustan Reprographics, Hindustan Telecommunications and Indian Computer Software Company into HCL Limited exhibited synergy in transfer of technology and resources to enable the company to cut down imports of components at a fabulous duty of 198%. Similarly, Eicher had the synergy advantage in merging with subsidiaries Eicher Good Earch, Eicher Farm technology and finance as the company could borrow increased funds from banks and institutions.

(2) Diversification

Mergers and acquisitions are motivated with the objective to diversify the activities so as to avoid putting all the eggs in one basket and obtain advantage of joining the resources for enhanced debt financing and better serviceability to shareholders. Such amalgamations result in creating conglomeratic undertakings. But critics hold that diversification caused by merger of companies does not benefit the shareholders as they can get better returns by having diversified portfolios by holding individual shares of these companies.

(3) Taxation advantages

Mergers take place to have benefits of tax laws and company having accumulated losses may merge with a profit earning company that will shield the income from taxation. Section 72A of Income Tax Act, 1961 provides this incentive for reverse mergers for the survival of sick units.

(4) Growth advantage

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Mergers and acquisitions are motivated with a view to sustain growth or to acquire growth. To develop new areas becomes costly, risky and difficult than to acquire a company in a growth sector even though the acquisition is on premium rather than investing in a new assets or new establishments.

(5) Production capacity reduction

To reduce capacity of production merger is sometimes used as a tool particularly during necessionary times as was in early 1980 in USA. The technique is used to nationalise traditional industries.

(6) Managerial motivates

Managers benefit in rank, status and perquisites as the enterprise grows and expands because their salaries, perquisites and status often increase with the size of the enterprise. The acquirer may motivate managerial support by assuring benefits of larger size of the company to the managerial staff. The resultant large company can offer better security for salary earners.

(7) Acquisition of specific assets

Surviving company may purchase only the assets of the other company in merger. Sometimes vertical mergers are done with the motive to secure source of raw material but acquirer may purchase the specific assets of the acquiree rather than acquiring the whole undertaking with assets and liabilities.

The assets may also be acquired at a discount to obtain a going concern cheaply.

There can be many situations to take over the assets of a company at discount viz. (i) the acquiree may be in possession of valuable land and property shown at depreciated value/historical costs in books of account which underestimates the current replacement value. Thus, acquirer shall be benefited by acquiring the assets of the company and selling them off subsequently; (ii) to acquire non-profit making company, close down its loss making activities and sell off the profitable sector to make gains; (iii) the existing management is incapable of utilising the assets, the acquirer might take over ungeared company and increase its debt secured on acquiree’s assets.

(8) Acquisition by management or leveraged buyouts

The acquisition of a company can be had by the management personnel. It is known as management buyout. This practice is common in USA for over 25 years and quite in vogue in UK. Management may raise capital from the market or institutions to acquire the company on the strength of its assets, known as leveraged buyouts.

(9) Other reasons

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There may be many other reasons motivating mergers in addition to the above ones viz. profit enhancement for the company, achieving efficiency, increasing market power, tax and accounting opportunities, growth as a goal and many speculative goals etc. depending upon the circumstances and prevailing conditions within the company and the economy of the country.

Advantages of mergers and takeovers

Mergers and takeovers are permanent form of combinations which vest in management complete control and provide centralised administration which are not available in combinations of holding company and its partly owned subsidiary. These are in general the advantages which accrue to the organisation besides multitude of gains already discussed.

Shareholders in the selling company gain from the merger and takeover as the premium offered to induce acceptance of the merger or takeover offers much more price than the book value of shares.

Shareholders in the buying company gain in the long run with the growth of the company not only due to synergy but also due to “books trapping earnings”.

Motivation for mergers and acquisitions

Mergers and acquisitions are caused with the support of shareholder, managers and promoters of the combining companies. The factors which motivate the shareholders and managers to lend support to these combinations and the resultant consequences they have to bear are briefly noted below based on the research work done by various scholars globally.

(1) From the standpoint of shareholders

Investments made by shareholders in the companies subject to merger should enhance in value. The sale of shares from one company’s shareholders to another and holding investment in shares should give rise to greater values i.e. the opportunity gains in alternative investments. Shareholders may gain from merger in different ways viz. from the gains and achievements of the company i.e. through (a) realisation of monopoly profits; (b) economies of scale; (c) diversification of product line; (d) acquisition of human assets and other resources not available otherwise; (e) better investment opportunity in combinations.

Realisation of gains from the merger and acquisition to shareholder in the above form might not be generalised but one or more features would generally be available in each merger where shareholders may have attraction and favour merger.

(2) From the standpoint of managers

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Managers are concerned with improving operations of the company managing the affairs of the company effectively for all round gains and growth of the company which will provide them better deals in raising their status, perks and fringe benefits. Mergers where all these things are the guaranteed outcome get support from managers. At the same time, where managers have fear of displacement at the hands of new management in amalgamated company and also resultant depreciation from the merger then support from them becomes difficult.

(3) Promoters’ gains

Mergers do offer to company promoters the advantage of increasing the size of their company and the financial structure and strength. They can convert a closely-held and private limited company into a public company without contributing much wealth and without losing control. In the above example of HCL, only Hindustan Reprographics Ltd. was public company whereas the other three merging entities were private limited companies. The promoters of Hindustan Computers were allotted shares worth Rs.1.27 crores on merger in a new company called HCL equity of Rs.1.48 crores shares. This gain was against their original investment of meagre Rs.40 lakhs in Hindustan Computers and they did not invest any money extra in getting shares worth Rs.1.48 crores.

Another recent example is of Jaiprakash Industries which was formed out of merger of Jaiprakash Associates and Jay Pee Rewa Cement. Jaiprakash Associates was a closely-held company. The merger enabled the promoters to have stake at 60% (Rs.39.85 crores) in Jaiprakash Industries Ltd. against an investment of Rs.4.5 crore in Jaiprakash Associates. Thus, merger invariably results into monetary gains for the promoters and their associates in the surviving company.

Impact of mergers on general public

Impact of mergers on general public could be viewed as aspect of benefits and costs to:

(1) Consumers of the product of services;

(2) Workers of the companies under combination;

(3) General public affected in general having not been user or consumer of the worker in the companies under merger plan.

(1) Consumers

The economic gains realised from mergers (i.e. enhanced economies and diversification leading to lower costs and better quality products) are passed on to consumers in the form of lower prices and better quality of the product which directly raise their standard of living and quality of life. The balance of benefits in favour of consumers will depend upon the fact whether or not the mergers increase or decrease competitive economic and

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productive activity which directly affect the degree of welfare of the consumers through changes in price levels, quality of products, after sales service, etc.

(2) Workers community

The benefit or loss from mergers to worker community will depend upon the level of satisfaction of their demands, merger of companies provides in the form of employment, increased wages, environmental improvements, better living conditions and amenities. The merger or acquisition of a company by a conglomerate or other acquiring company may have the effect on both the sides of increasing the welfare in the form of enhanced quality of life or decrease the welfare by creating unemployment through retrenchment and resultant lack of purchasing power and other miseries of life. Two sides of the impact as discussed by the researchers and academicians are: first, merges with cash payment to shareholders provide opportunities for them to invest this money in other companies which will generate further employment and growth to the uplift of the economy in general. Secondly, any restrictions placed on such mergers will decrease the growth and investment activity with corresponding decrease in employment. Both workers and communities will suffer on lessening job opportunities, preventing the distribution of benefits resulting from diversification of production activity. Diversification fosters and provides opportunities for advancement in career, training in new skills amount may other alike benefits.

(3) General Public

Mergers result into centralised concentration of power in small number of corporate leaders which results in the concentration of an enormous aggregation of economic power in their hands. Economic power is to be understood in specific limited sense as the ability to control prices and industries output as monopolists. Such monopolists affect social and political environment to tilt everything in their favour to maintain their power and expand their business empire. These advances result into deceleration of level of welfare and well being of the general public which are subjected to economic exploitation. But in a free economy a monopolist does not stay for a longer period as other companies enter into the field to reap the benefits of high prices set in by the monopolist. This enforces competition in the market as consumers are free to substitute the alternative products. Therefore, it is difficult to generalise that mergers affect the welfare of general public adversely or favourably. Every, merger of two or more companies has to be viewed from different angles in the business practices which protects the interest of the shareholders in the merging company and also serves the national purpose to add to the welfare of the employees, consumers and does not create hindrance in administration of the Government policies.

Choice for alternative modes of acquisition

The foregoing discussion reveals that the various terms used in business combinations carry generally synonymous connotations and can be used interchangeably as has been indicated while explaining the meanings of these terms. All the different terms carry one single meaning of “merger” but each term cannot be given equal treatment in the

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discussion because law has created a dividing line between ‘take-over’ and acquisitions by way of merger, amalgamation or reconstruction. Particularly the takeover Regulations for substantial acquisition of shares and takeovers known as SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1977 vide section 3 excludes any attempt of merger done by way of any one more of the following modes:

(a) by allotment in pursuance of an application made under a public issue;

(b) allotment pursuant to an application made by the shareholders for right issue;(c) preferential allotment made in pursuance of a resolution passed under section

81(1A) of the Companies Act, 1956;

(d) allotment of the underwriters pursuant to underwriters agreements;

(e) inter-se-transfer of shares amongst group companies, relatives (within the meaning of section 6 of the Companies Act, 1956, Indian promoters and foreign collaborators who are shareholders/promoters;

(f) acquisition of shares in the ordinary course of business, by registered stock brokers, public financial institutions and banks on own account or as pledges;

(g) acquisition of shares by way of transmission on succession or inheritance;

(h) acquisition of shares by government companies and statutory corporations;

(i) transfer of shares from state level financial institutions to co-promoters in pursuance to agreements between them;

(j) acquisition of shares in pursuance to rehabilitation schemes under Sick Industrial Companies (Special Provisions) Act, 1985 or schemes of arrangements, mergers, amalgamation, demerger, etc. under the Companies Act, 1956 or any law or regulations, Indian or foreign;

(k) acquisition of shares of company whose shares are not listed on any stock exchange. However, this exemption is not available if the said acquisition results into control of a listed company;

(l) such other cases as may be exempted from the applicability of Chapter III of SEBI regulations by SEBI.

The basic logic behind substantial disclosure of takeover of a company through acquisition of shares is that the common investors and shareholders should be made aware of the larger financial stake in the company of the person who is acquiring such company’s shares.

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The main objective of these Regulations is to provide greater transparency in the acquisition of shares and the takeovers of companies through a system of disclosure of information.

Consideration of Merger and Takeover

Merger and takeovers are two different approaches to business combinations. Mergers are pursued under the Companies Act, 1956 vide sections 391/394 thereof or may be envisaged under the provisions of Income-tax Act, 1961 or arranged through BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985 whereas takeovers fall solely under the regulatory frame work of the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 1997.

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