MERGERS & ACQUISITION

IN THIS CHAPTER… Concept Types Relevance in 21st century businesses -

Regulatory control.

The term corporate restructuring may simply be defined as a comprehensive process by which a company can consolidate its business operation and strengthen its position for achieving the desired objectives-staying, synergetic, slim, competitive and successful.

MERGER (Amalgamation)

A merger is a combination of two or more companies into one company.

It may be in the form of one or more companies being merged into an existing company or a new company may be formed to merge two or more existing companies.

The Income Tax Act, 1961 of India uses the term ‘amalgamation’ for merger.

The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock.

According to Section 2 (1A) of the Income Tax Act,1961, the term ‘Amalgamation’ means the merger of one or more companies with another company or merger of two or more companies to form one company in such a manner that:

All the property of the amalgamating company or companies immediately before the amalgamation becomes the property of amalgamated company by virtue of the amalgamation.

All the liabilities of the amalgamating company or companies immediately before the amalgamation becomes the liabilities of amalgamated company by virtue of the amalgamation.

FORMS OF MERGERS

Mergers through absorption: a combination of two or more companies into an existing company is known as ‘absorption’.

In a merger through absorption all companies except one go into liquidation and lose their separate identities.

For example: there are two companies A ltd. And B ltd. Company B Ltd. Merged into company A Ltd. Leaving its assets and liabilities to the acquiring company A Ltd; and company B Ltd. Is liquidated.

It is a case of absorption.

An e.g. of this type of merger in India is the absorption of Reliance Polypropylene Ltd. (RPPL) by Reliance Industries Ltd.

As a result of the absorption, the RPPL was liquidated and its shareholders were offered 20 shares of RIL for every 100 shares of RPPL held by them.

Mergers through Consolidation: a consolidation is a combination of to or more companies in to a new company.

In this form of merger all the existing companies, which combine, go into liquidation and form a new company with different entity

The entity of the consolidating corporations is lost and their assets and liabilities are taken over by the new corporation or company.

The assets of the old concerns are sold to the new concern and their management and control also passes into the hands of new concern.

For example: there are two companies A ltd. And B ltd; and they merge together to form a new company called AB Ltd. or C Ltd.

It is a case of consolidation.

TYPES OF MERGERS

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.

Horizontal mergers are those mergers where the companies manufacturing similar kinds of commodities or running similar type of businesses merge with each other.

HORIZONTAL MERGER

The idea behind this type of merger is to avoid the competition between the units.

For example: The formation of Brook Bond Lipton India Ltd. through the

merger of Lipton India and Brook Bond

The merger of Bank of Mathura with ICICI (Industrial Credit and Investment Corporation of India) Bank

The merger of BSES (Bombay Suburban Electric Supply) Ltd. with Orissa Power Supply Company

The merger of ACC (erstwhile Associated Cement Companies Ltd.) with Damodar Cement

A vertical merger represents a merger of firms engaged at different stages of production or distribution of the same product or service.

In this case two or more companies dealing in the same product but at different stages may join to carry out the whole process itself.

A petroleum producing company may set up its own petrol pump for its selling.

VERTICAL MERGER

Similarly, a textile unit may merge with a transport company for carrying its products to different places.

The idea behind this type of merger is to take up two different stages of work to ensure speedy production and quick services.

For example: The merger of Reliance Petroleum Ltd.

With Reliance Industries Ltd. D

A merger between firms that are involved in totally unrelated business activities.

Two types of conglomerate mergers: Pure conglomerate mergers involve firms with

nothing in common. Mixed conglomerate mergers involve firms

that are looking for product extensions or market extensions.

Example of Conglomerate Merger : Walt Disney Company and the American

Broadcasting Company.

CONGLOMERATE MERGER

It occurs where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company.

Example : merger of Prudential and ICICI bank.

CONGENERIC MERGER

A unique type of merger called a reverse merger is used as a way of going public without the expense and time required by an IPO.

In case of ordinary merger, a profit making company takes over another company which may or may not be making a profit

REVERSE MERGER

The objective is to expand or diversify the business.

However in case of reverse merger, a healthy company, merges into a financially weak company and the former is dissolved.

Reverse merger is carried out through the High Court route, but where one of the merging companies is a sick industrial company under SICA(Sick Industrial Companies Act), such merger must take place through BIFR (Board for Industrial and Financial Reconstruction)

BENEFITS OF MERGERS

GROWTH: A company may not grow rapidly through internal expansion.

Mergers or amalgamation enables satisfactory and balanced growth of a company.

It can cross many stages of growth through mergers.

Growth through mergers is also cheaper and less risky.

DIVERSIFICATION: Two or more companies operating in different lines can diversify their activities through mergers.

Since different companies are already dealing in their respective lines, there will be less risk in diversification.

When a company tries to enter new lines of activities, then it may face a number of problems in production, marketing etc.

When some concerns are already operating in different lines they have already crossed many obstacles and difficulties.

Mergers will bring the experiences of different persons in varied activities.

So, amalgamation will be the best way of diversification.

UTILIZATION OF TAX SHEILDS: When a company with accumulated losses merges with a profit making company, it is able to utilize tax shields.

A company having losses will not be able to set off losses against future profits, because it is not a profit earning unit.

On the other hand, if it merges with a concern earning profits then the accumulated losses of one unit will be set off against future profits of other unit.

In this way, the merger or amalgamation will enable the concern to avail tax benefits.

BETTER FINANCIAL PLANNING: The merged companies will able to plan their resources in a better way.

The collective finances of the merged companies will be more and their utilization may be better than in the separate concerns.

It may happen that one of the merging companies have short gestation period, while the other has a longer gestation period.

The profit of the company with short gestation period will be utilized to fiancé other company.

When the company with longer gestation period starts earning profits, then it will improve financial position as a whole.

ELIMINATION OF COMPETITION : The merger or he amalgamation of two or more companies will be able to save their advertising expenses, thus enabling them to reduce their prices and also reduce the competition in the market.

ACQUISITION/TAKEOVER

An acquisition, also known as takeover, is the buying of one company (the ‘target’) by another.

An acquisition typically has one company-the buyer-that purchases the assets and shares of the seller, with the form of payment being cash, the securities of the buyer, or other assets of value to the seller.

In a stock purchase transaction, the seller’s shares are not necessarily combined with the buyer’s existing company, but often kept separate as a new subsidiary or operating division.

In an asset purchase transaction, the assets conveyed by the seller to the buyer become additional assets of the buyer’s company, with the hope and the expectation that the value of assets purchased will exceed the price paid over time.

An acquisition may be friendly or hostile.

In the former case, the companies cooperate in negotiations;

In the latter case, the takeover target is unwilling to be bought, or the target’s board has no prior knowledge of the offer.

Acquisition usually refers to the purchase of a smaller firm by a larger one.

TYPES OF ACQUISITIONS

This occurs when one business makes a bid to buy other business, and the other business gladly accept.

The shareholders of the acquired company can receive cash, but more commonly they receive a certain no. of shares in acquiring company.

FRIENDLY TAKEOVER

This is when one company moves to acquire a target company even if the target company does not want to be bought out.

This strategy can only be accomplished through public businesses, because essentially what happens is that the acquiring company buys controlling amount of shares of stock in the target company.

HOSTILE TAKEOVER

BENEFITS OF ACQUISITIONS

INCREASED MARKET POWER: A primary reason for acquisitions is to achieve greater market power.

Market power exists when a firm is able to sell its goods and services above competitive levels.

Market power is usually derived from the size of the firm and its resources and capabilities to compete in the marketplace.

It is also affected by the firm’s share of the market.

Therefore, most acquisitions that are designed to achieve greater market power entail buying a competitor, a supplier, a distributor, or a business in a highly related industry to allow the exercise of a core competence and to gain competitive advantage in the acquiring firm’s primary market.

OVERCOMING ENTRY BARRIERS: Barriers to entry are the factors associated with the firms currently operating in it that increase the expense and difficulty faced by new ventures trying to enter that particular market.

Facing the entry barriers, a new entrant may find acquiring an established company to be more effective than entering the market as a competitor offering a good or service that is unfamiliar to current buyers.

Although acquisition can be expensive, it does provide the new entrant with immediate market access.

INCREASED DIVERSIFICATION: Acquisition are also used to diversify firms.

Based on the experience and the insights resulting from it, firms typically find it easier to develop and introduce new products in markets currently served by the firm.

In contrast, it is difficult for companies to develop products that differ from their current lines for markets in which they lack experience.