Mergers & Aquisitions

III AFA UNIT-4 MERGERS & ACQUISITIONS ADV FM NOTES-2020
Corporate Restructuring is an expression that connotes a restructuring process undertaken by business

enterprise. It is the process of redesigning one or more aspects of a company. Hence, Corporate
Restructuring is a comprehensive process by which a company can consolidate its business operations
and strengthen its position for achieving its short-term and long-term corporate objectives. A business
may growover time as the utility of its products and services is recognized, but it is a long drawn process.
It may also grow through an inorganic process, symbolized by an instantaneous expansion in work force,
customers,infrastructure resources and thereby an overall increase in the revenues and profits of the
entity.
The concept of merger and acquisition in India was not popular until the year 1988. During that period a
very small percentage of businesses in the country used to come together, mostly into a friendly
acquisition with a negotiated deal. The key factor contributing to fewer companies involved in the merger
was the regulatory and prohibitory provisions of MRTP Act, 1969. According to this Act, a company or a
firm has to follow a burdensome procedure to get approval for merger and acquisitions.
The year 1988 witnessed one of the oldest business acquisitions or company mergers attempt in India. It
is the well-known ineffective unfriendly takeover bid by Swaraj Paul to overpower DCM Ltd. and Escorts
Ltd.
Further to that many other non-resident Indians had put in their efforts to take control over various
companies through their stock exchange portfolio.
Corporate Restructuring is concerned with arranging the business activities of the Corporate as a whole
so as to achieve certain pre-determined objectives at corporate level. Objectives may include the
following:
• To enhance shareholders value

• Orderly redirection of the firms activities
• Deploying surplus cash from one business to finance profitable growth in another
• Exploiting inter-dependence among present or prospective businesses
• Risk reduction
• Development of core-competencies
• To obtain tax advantages by merging a loss-making company with a profit-making company
• To have access to better technology
• To become globally competitive
• To increase the market share
MERGERS AND ACUISITIONS

Corporate restructuring refers to a broad array of activities that expand or contract a firm’s operations or
substantially modify its financial structure or bring about a significant change in its ownership structure.
Inter alia, it includes activities such as mergers, purchases of business units, takeovers, slump sales,
demergers, and equity carveouts. We will refer to these activities collectively as mergers, acquisitions,
and restructuring (a widely used, though not a very accurate, term) or just corporate restructuring.
Acquisitions
Acquisition, a broad term, inter alia, subsumes the following transactions:
Merger
A merger refers to a combination of two or more companies into one company. It may involve absorption
or consolidation. In an absorption, one company acquires another company. For example, Hindustan
Lever Limited absorbed Tata Oil Mills Company. In a consolidation, two or more companies combine to
form a new company. For example, Hindustan Computers Limited, Hindustan Instruments Limited, Indian
Software Company Limited, and Indian Reprographics Limited combined to form HCL Limited.
In India, mergers, called amalgamations in the legal parlance (hereafter we shall use the terms mergers
and amalgamations interchangeably)
Purchase of Division or Plant
A company may acquire a division or plant of another company. For example, SRF India bought the nylon
cord division of CEAT Limited. Typically, the acquiring company acquires the assets and takes over the
liabilities of the concerned division and it pays cash compensation to the selling company. For example,
Abbott Laboratories acquired the pharmaceuticals business of Piramal Health Care for $3.72 billion. Note
that in a transaction of this kind only a portion of the assets and liabilities of one company are taken over
by another company.
Takeover
A takeover generally involves the acquisition of a certain stake in the equity (usually between 50 percent
and 100 percent) capital of a company which enables the acquirer to exercise control over the affairs of
the company. For example, HINDALCO took over INDAL by acquiring a 54 percent stake in INDAL from its
overseas parent, Alcan. Subsequently, however, INDAL was merged into HINDALCO. Unlike a merger or
purchase of division, a takeover does not involve transfer of assets and liabilities.
Leveraged Buyout
A leveraged buyout is a variant of takeover or purchase of a division, effected substantially with the help
of debt finance.
Divestitures
While acquisitions lead to expansion of assets or increase of control, divestitures result in contraction of
assets or relinquishment of control. The common forms of divestitures are briefly described below:
Partial Selloff
A partial selloff involves the sale of a business division or plant of one company to another. It is the mirror
image of a purchase of a business division.
Sale of Equity Stake
In a sale of equity stake, one investor (or a group of investors) sells an equity stake, usually representing
a controlling block, to another investor. For example, Alcan sold its 54 percent equity stake in INDAL to
HINDALCO. This transaction is a mirror image of a takeover.
Demerger
A demerger involves the transfer by a company of one or more of its business divisions to another
company which is newly set up. For example, the Great Eastern Shipping Company transferred its offshore
division to a new company called The Great Offshore Limited. The company whose business division is
transferred is called the demerged company and the company to which the business division is transferred
is called the resultant company.
Equity Carveout
In an equity carveout, a parent company sells a portion of its equity in a wholly owned subsidiary. The sale
may be to the general investing public or a strategic investor.
REASONS FOR MERGERS

Mergers may be classified into several types: horizontal, vertical, conglomerate, and Cogeneric. A
horizontal merger represents a merger of firms engaged in the same line of business. A vertical merger
represents a merger of firms engaged at different stages of production in an industry. A conglomerate
merger represents a merger of firms engaged in unrelated lines of business. A Cogeneric merger
represents a merger of firms engaged in related lines of business.
The principal economic rationale of a merger is that the value of the combined entity is expected to be
greater than the sum of the independent values of the merging entities. If firms A and B merge, the value
of the combined entity, V(AB), is expected to be greater than (VA + VB), the sum of the independent values
of A and B.
A variety of reasons like growth, diversification, economies of scale, managerial effectiveness, utilisation
of tax shields, lower financing costs, strategic benefit, and so on are cited in support of merger proposals.
Some of them appear to be plausible in the sense that they create value; others seem to be dubious as
they do not create value.
Plausible Reasons
The most plausible reasons in favour of mergers are: strategic benefit, economies of scale, economies of
scope, economies of vertical integration, complementary resources, tax shields, utilisation of surplus
funds, and managerial effectiveness.
Strategic Benefit
If a firm has decided to enter or expand in a particular industry, acquisition of a firm engaged in that
industry, rather than dependence on internal expansion, may offer several strategic advantages: (i) As a
pre-emptive move it can prevent a competitor from establishing a similar position in that industry. (ii) It
offers a special ‘timing’ advantage because the merger alternative enables a firm to ‘leap frog’ several
stages in the process of expansion. (iii) It may entail less risk and even less cost. (iv) In a ‘saturated’ market,
simultaneous expansion and replacement (through a merger) makes more sense than creation of
additional capacity through internal expansion.
Economies of Scale
When two or more firms combine, certain economies are realised due to the larger volume of operations
of the combined entity. These economies arise because of more intensive utilisation of production
capacities, distribution networks, engineering services, research and development facilities, data
processing systems, so on and so forth. Economies of scale are most prominent in the case of horizontal
mergers where the scope for more intensive utilisation of resources is greater. In vertical mergers, the
principal sources of benefits are improved coordination of activities, lower inventory levels, and higher
market power of the combined entity. Finally, even in conglomerate mergers there is scope for reduction
or elimination of certain overhead expenses.
Economies of Scope
A company may use a specific set of skills or assets that it possesses to widen the scope of its activities.
For example, Proctor and Gamble can enjoy economies of scope if it acquires a consumer product
company that benefits from its highly regarded consumer marketing skills.
Economies of Vertical Integration
When companies engaged at different stages of production or value chain merge, economies of vertical
integration may be realised. For example, the merger of a company engaged in oil exploration and
production (like ONGC) with a company engaged in refining and marketing (like HPCL) may improve
coordination and control.
Vertical integration, however, is not always a good idea. If a company does everything in-house, it may
not get the benefit of outsourcing from independent suppliers who may be more efficient in their
segments of the value chain.
Complementary Resources
If two firms have complementary resources, it may make sense for them to merge. For example, a small
firm with an innovative product may need the engineering capability and marketing reach of a big firm.
With the merger of the two firms it may be possible to successfully manufacture and market the
innovative product. Thus, the two firms, thanks to their complementary resources, are worth more
together than they are separately.
A good example of a merger of companies which complemented each other well is the merger of Brown
Bovery and Asea that resulted in Asea Brown Bovery (ABB). Brown Bovery was international, whereas
Asea was not. Asea excelled in management, whereas Brown Bovery did not. The technology, markets,
and cultures of the two companies fitted well.
Tax Shields
When a firm with accumulated losses and/or unabsorbed depreciation merges with a profit-making firm,
tax shields are utilised better. The firm with accumulated losses and/or unabsorbed depreciation may not
be able to derive tax advantages for a long time. However, when it merges with a profit-making firm, its
accumulated losses and/or unabsorbed depreciation can be set off against the profits of the profit-making
firm and tax benefits can be quickly realised.
Utilisation of Surplus Funds
A firm in a mature industry may generate a lot of cash but may not have opportunities for profitable
investment. Such a firm ought to distribute generous dividends and even buy back its shares, if the same
is possible. However, most managements have a tendency to make further investments, even though they
may not be profitable. In such a situation, a merger with another firm involving cash compensation often
represents a more efficient utilisation of surplus funds.
Dubious Reasons for Mergers

Sometimes mergers are motivated by a desire to diversify, lower financing costs, and achieve a higher
rate of earnings growth. Prima facie, these objectives look worthwhile, but they are not likely to enhance
value.
Diversification
A commonly stated motive for mergers is to achieve risk reduction through diversification. The extent to
which risk is reduced, of course, depends on the correlation between the earnings of the merging entities.
While negative correlation brings greater reduction in risk, positive correlation brings lesser reduction in
risk.
How valuable is such risk reduction to investors? If investors can diversify on their own by buying stocks
of companies which propose to merge, they do not derive any benefit from the proposed merger. Any
investor who wants to reduce risk by diversifying between two companies, say, Kappa Company and
Gamma Limited, may simply buy the stocks of these two companies and ‘merge’ them into a portfolio.
The ‘merger’ of these companies is not necessary for him to enjoy the benefits of diversification. As a
matter of fact, his ‘homemade’ diversification gives him far greater flexibility. He can combine the stocks
of Kappa and Gamma in any proportion he likes as he is not confronted with a ‘fixed’ proportion that
results from the merger.
Corporate diversification, however, may offer value at least in two special cases: (i) If a company is plagued
with problems which can jeopardise its existence and its merger with another company can save it from
potential bankruptcy. (ii) If investors do not have the opportunity of ‘home-made’ diversification because
one of the companies is not traded in the marketplace, corporate diversification may be the only feasible
route to risk reduction.
Lower Financing Costs
The consequence of larger size and greater earnings stability, many argue, is to reduce the cost of
borrowing for the merged firm. The reason for this is that the creditors of the merged firm enjoy better
protection than the creditors of the merging firms independently. If two firms, A and B, merge, the
creditors of the merged firm (call it firm AB) are protected by the equity of both the firms. While this
additional protection reduces the cost of debt, it imposes an extra burden on the shareholders;
shareholders of firm A must support the debt of firm B, and vice versa. In an efficiently operating market,
the benefit to shareholders from lower cost of debt would be offset by the additional burden borne by
them – as a result there would be no net gain.
MECHANICS OF A MERGER
In India, mergers and acquisitions are regulated mainly under the Companies Act.
A merger is a complicated transaction, involving fairly complex legal, tax, and accounting considerations.
While evaluating a merger proposal, one should bear in mind the following legal, tax, and accounting
provisions.
Legal Procedure
Amalgamation involves a fairly long process. The procedure for amalgamation normally involves the
following steps:
1. Examination of Object Clauses -The memorandum of association of both the companies

should be examined to check if the power to amalgamate is available. Further, the object clause
of the amalgamated company (transferee company) should permit it to carry on the business of
the amalgamating company (transferor company). If such clauses do not exist, necessary
approvals of the shareholders, boards of directors, and Company Law Board are required.
2. Intimation to Stock Exchanges- The stock exchanges where the amalgamated and
amalgamating companies are listed should be informed about the amalgamation proposal. From
time to time, copies of all notices, resolutions, and orders should be mailed to the concerned stock
exchanges.
3. Approval of the Draft Amalgamation Proposal by the Respective Boards The draft amalgamation
proposal should be approved by the respective boards of directors. The board of each company
should pass a resolution authorising its directors/executives to pursue the matter further.
4. Application to the High Court/s Once the draft of amalgamation proposal is approved by the
respective boards, each company should make an application to the High Court of the state where
its registered office is situated so that it can convene the meetings of shareholders and creditors
for passing the amalgamation proposal.
5. Despatch of Notice to Shareholders and Creditors In order to convene the meeting of

shareholders and creditors, a notice and an explanatory statement of the meeting, as approved
by the High Court, should be despatched by each company to its shareholders and creditors so
that they get 21 days advance intimation. The notice of the meetings should also be published in
two newspapers (one English and one vernacular). An affidavit confirming that the notice has
been despatched to the shareholders/creditors and that the same has been published in
newspapers should be filed in the court.
6. Holding of Meetings of Shareholders and Creditors A meeting of shareholders should be held

by each company for passing the scheme of amalgamation. At least 75 percent (in value) of
shareholders, in each class, who vote either in person or by proxy, must approve the scheme of
amalgamation. Likewise, in a separate meeting, the creditors of the company must approve of the
amalgamation scheme. Here, too, at least 75 percent (in value) of the creditors who vote, either
in person or by proxy, must approve of the amalgamation scheme.
7. Petition to the High Court for Confirmation and Passing of High Court Orders Once the
amalgamation scheme is passed by the shareholders and creditors, the companies involved in the
amalgamation should present a petition to the High Court for confirming the scheme of
amalgamation. The High Court will fix a date of hearing. A notice about the same has to be
published in two newspapers. After hearing the parties concerned and ascertaining that the
amalgamation scheme is fair and reasonable, the High Court will pass an order sanctioning the
same. However, the High Court is empowered to modify the scheme and pass orders accordingly.
8. Filing the Order with the Registrar Certified true copies of the High Court order must be filed
with the Registrar of Companies within the time limit specified by the Court.
9. Transfer of Assets and Liabilities After the final orders have been passed by both the High
Courts, all the assets and liabilities of the amalgamating company will, with effect from the
appointed date, have to be transferred to the amalgamated company.
10. Issue of Shares and Debentures The amalgamated company, after fulfilling the provisions of
the law, should issue shares and debentures of the amalgamated company. (Cash payment may
have to be arranged in some cases.) The new shares and debentures so issued will then be listed
on the stock exchange.
Recent Mergers and Acquisition

Acquirer Target Company Deal Size Comments
Flipkart Myntra USD300 mn Acquisition led to
scripting of largest
ecommerce stories
Asian Paints Ess Ess Bathroom Undisclosed To be one stop provider
products in home décor space
RIL Network 18 Media & Rs.4000 Cr. 78% shares were taken
Investments over by RIL
Merck Sigma USD17 bn Acquisition to boost lab
supply business of
Merck
Sun Pharma Ranbaxy USD4 bn Increased presence in
global and domestic
markets
TCS CMC Merger to consolidate
IT business
Tata Power PT Arutmin Indonesia Rs.47.4 bn Purchase 30% stake
Groupe Lactalis Tirumala Milk USD275 mn Lactalis entry into India
CSP CX Aditya Birla Minacs USD260 mn Aditya Birla’s exit from
IT industry
Thomas Cook Sterling India Rs. 870cr Entry into hospitality
business
Yahoo Bookpad USD15mn First acquisition made
by Yahoo
Corporate Restructuring in India is governed by the following Acts, Rules, etc.:

• Chapter XV of The Companies Act, 2013 (the Act)
• Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016
• Income Tax Act, 1961
• Accounting Standards
• Foreign Exchange Management Act,1999
• Competition Act, 2002
• Intellectual Property Rights
• Indian Stamp Act, 1899
• State Stamp Acts
• Insolvency and Bankruptcy Code, 2016
Demerger
It is a business strategy in which a single business is broken into components, either to operate on their
own,to be sold or to be dissolved. A demerger allows a large company, such as a conglomerate, to split
off its various brands to invite or prevent an acquisition, to raise capital by selling off components that are
no longer part of the business's core product line, or to create separate legal entities to handle different
operations.
Demerger is an arrangement whereby some part / undertaking of one company is transferred to another
company which operates completely separate from the original company. Shareholders of the original
company are usually given an equivalent stake of ownership in the new company.
Demerger under Section 2(19AA) of the Income tax Act, 1961 means the transfer, pursuant to a scheme
of arrangement under section 230 to 232 of the Act, by a demerged company of its one or more
undertakings to the resulting company in such a manner that:-
(i) All the property of the undertaking, being transferred by the demerged company, immediately before
the demerger, becomes the property of the resulting company by virtue of demerger;
(ii) All the liabilities relatable to the undertaking, being transferred by the demerged
company,immediately before the demerger, become the liabilities of the resulting company by virtue of
the demerger;
(iii) The property and the liabilities of the undertaking or undertakings, being transferred by the demerged
company are transferred at values appearing in its books of account immediately before the demerger;
(iv) The resulting company issues, in consideration of the demerger, its shares to the shareholders of the
demerged company on a proportionate basis except where the resulting company itself is a shareholder
of the demerged company;
(v) The shareholders holding not less than three-fourth in value of shares in the demerged company (other
than shares already held therein immediately before the demerger, or by a nominee for, the resulting
company or, its subsidiary) become shareholders of the resulting company or companies by virtue of the
demerger; otherwise than as a result of the acquisition of the property or assets of the demerged or any
undertaking thereof by the resulting company;
(vi) the transfer of the undertaking is on a going concern basis
(vii) Demerger in accordance with the conditions notified under Section 72A(5) of Income Tax Act, 1961.
Examples:
• Reliance Industries demerged to Reliance Industries and Reliance Communications Ventures

Ltd,Reliance Energy Ventures Ltd, Reliance Capital Ventures Ltd, Reliance Natural Resources Ltd.
• In April 2018, Whitbread plc. announced to de-merge Costa Coffee from their stable of
businesses.
• Pfizer sold their infant nutrition business to Nestle.
Types of Demerger
1. Divestiture
Divestiture means selling or disposal of assets of the company or any of its business
undertakings/divisions,usually for cash (or for a combination of cash and debt). It is explained in
detail in further.
2. Spin-offs
The shares of the new entity are distributed to the shareholders of the parent company on a pro-
rata basis.
The parent company also retains ownership in the spun-off entity. Spin-offs have two approaches
that can be followed. In the first approach, the company distributes all the shares of the new
entity to its existing shareholders on a pro rata basis. This leads to the creation of two different
companies holding the same proportions of equity as compared to the single company existing
previously. The second approach is the floatation of a new entity with its equity being held by the
parent company. The parent company later sells the assets of the spun off company to another
company.
3. Splits/divisions
Splits involve dividing the company into two or more parts with an aim to maximize profitability
by removing stagnant units from the mainstream business. Splits can be of two types, Split-ups
and Split-offs.
Split-ups: It is a process of reorganizing a corporate structure whereby all the capital stock and
assets are exchanged for those of two or more newly established companies resulting in the
liquidation of the parent corporation.
Split-offs: It is a process of reorganizing a corporate structure whereby the capital stock of a

division or subsidiary of corporation or of a newly affiliated company is transferred to the
stakeholders of the parent corporation in exchange for part of the stock of the latter. Some of the
shareholders in the parent company are given shares in a division of the parent company which
is split off in exchange for their shares in the parent company.
4. Equity Carve-Outs
Equity carve-outs are referred to a percentage of shares of the subsidiary company being issued
to the public. This method leads to a separation of the assets of the parent company and the
subsidiary entity.
Equity carve outs result in publicly trading the shares of the subsidiary entity.
Examples:
1. India’s largest engineering and construction company Larsen and Toubro Ltd (L&T) adopted
“assetlight strategy” by separating business units into independent subsidiaries by selling a
stake in businesses. The company, which is considered a corporate proxy for the broader
economy, divested its assets as a way to generate capital for investing in fresh projects.
2. In January 2017, the Government of India divested 10 per cent stake in Coal India Limited
throughthe offer-for-sale (OFS) route at Rs.358 per share and brought its holding down to
79.65 per cent.
SLUMP SALE
The transfer of the undertaking concerned as going concern is called “Slump sale”. Slump sale is
one of the methods that are widely used in India for corporate restructuring where the company
sells its undertaking.
The main reasons of slump sale are generally undertaken in India due to following reasons:
• It helps the business to improve its poor performance.

• It helps to strengthen financial position of the company.
• It eliminates the negative synergy and facilitates strategic investment.
• It helps to seek tax and regulatory advantage associated with it.
BUSINESS SALE/DIVESTITURE
Divestiture means selling or disposal of assets of the company or any of its business undertakings/
divisions,usually for cash (or for a combination of cash and debt) and not against equity shares to
achieve a desired objective, such as greater liquidity or reduced debt burden. Divestiture is
normally used to mobilize resources for core business or businesses of the company by realizing
value of non-core business assets.
For example: XYZ Ltd. is the parent of a food company, a car company, and a clothing company. If
XYZ Ltd. wishes to go out of the car business, it may divest the business by selling it to another
company, exchanging it for another asset, or closing down the car company.
Reasons for Divestitures
• Huge divisional losses

• Continuous negative cash flows from a particular division
• Difficulty in integrating the business within the company
• Unable to meet the competition
• Better alternatives of investment
• Lack of technological upgradations due to non-affordability
• Lack of integration between the divisions
• Legal pressures
E.g. Nestle is selling its US chocolate business, which includes brands such as BabyRuth,
Butterfinger, and Crunch to Ferrero for $2.8 billion. The deal is part of Nestle’s strategy to sell
underperforming brands and refocus on healthier products and fast-growing markets.
REVERSE MERGER
A reverse merger is a merger in which a private company becomes a public company by acquiring
it. It saves a private company from the complicated process and expensive compliance of
becoming a public company. Instead, it acquires a public company as an investment and converts
itself into a public company.
However, there is another angle to the concept of a reverse merger. When a weaker or smaller
company acquires a bigger company, it is a reverse merger. In addition, when a parent company
merges into its subsidiary or a loss-making company acquires a profit-making company, it is also
termed as a reverse merger.
The reason for reverse merger is:
• To carry forward tax losses of the smaller firm, this allows the combined entity to pay lower
taxes. Tax savings under Income Tax Act, 1961.
• Economies of scale of production

• Marketing network
• To protect the trademark rights, license agreements, assets of small/loss making company
Examples:
1. Merging of Oil exploration company Cairn India with parent Vedanta India
2. In 2002 Merging of ICICI with its arm ICICI Bank. The parent company’s balance sheet was more
than three times the size of its subsidiary at the time. The rational for the reverse merger was to
create a universal bank that would lend to both industry and retail borrowers.
2. Merging of Godrej Soaps, profitable and with a turnover of Rs.437 crore with loss-making
Gujarat Godrej Innovative Chemicals with a turnover of Rs.60 crore, the resulting firm was
named Godrej Soaps.
FINANCIAL RESTRUCTURING
Corporate financial restructuring is any substantial change in a company’s financial structure,
or ownership or control, or business portfolio, designed to increase the value of the firm, i.e.,
debt and equity restructuring.
Internal reconstruction of a company is the simplest form of financial restructuring. Under
this, various liabilities are reduced after negotiating with various stakeholders such as banks,
financial institutions,creditors, debenture holders and shareholders. It deals with the
restructuring of capital base and raising finance for new projects.
DEBT RESTRUCTURING
It involves a reduction of debt and an extension of payment terms or change in terms and
conditions, which
is less expensive. It is nothing but negotiating with bankers, creditors, vendors. It is the
process of reorganizing the whole debt capital of the company. It involves the reshuffling of
the balance sheet items as it contains the debt obligation of the company. Debt capital of the
company includes secured long term borrowing, unsecured long-term borrowing, and short
term borrowings.
• Restructuring of the secured long-term borrowing for improving liquidity and increasing the
cash flows for a sick company and reducing the cost of capital for healthy companies.
Restructuring of the unsecured long-term borrowings.
• Restructuring of the long-term unsecured borrowings can be in form of public deposits

and/or private loans (unsecured) and privately placed, unsecured bonds or debentures.
• Restructuring of other short-term borrowings: the borrowings that are very short in nature
are generally not restructured these can indeed be renegotiated with new terms. These types
of short-term borrowings include inter-corporate deposits clean bills & clean overdraft.
• Best method for corporate debt restructuring is Debt-equity swap. In the case of an debt-
equity swap,specified shareholders have right to exchange stock for a predetermined amount
of debt (i.e. bonds) in the same company. In debt-equity swap debt /bonds are exchanged
with shares/stock of the company.
CASE STUDY
Gammon India Ltd. invoked the Strategic Debt Restructuring (SDR) mechanism in the 2015-
2016. A total of 16 banks, led by ICICI Bank, decided to convert a part of their loan into 63.07
per cent equity. The SDR Scheme, an improved version of the erstwhile Corporate Debt
Restructuring, or CDR, mechanism, wherein lenders have sweeping powers to throw out
managements of companies whose assets have turned bad.
However, the bankers could not find a buyer for the entire Gammon India and instead decided
to restructure it into three parts - Power Transmission & Distribution (T&D), Engineering,
Procurement & Construction (EPC), and the residual business. The Thailand-based GP Group
has acquired the EPC assets while Ajanma Holdings bought stake in the T&D business.
Gammon India is one among two dozen companies where bankers have invoked the SDR
Scheme, to make the process of debt recovery faster and smoother. The list includes Alok
Industries, Usher Agro, Diamond Power, Monnet Ispat, Jaiprakash Power and IVRCL.
EQUITY RESTRUCTURING
It is a process of reorganizing the equity capital. It includes a reshuffling of the shareholders

capital and the reserves that are appearing on the balance sheet. Restructuring equity means
changing how the firm’s residual cash flows are divided and distributed among the firms
shareholders, with the goal of increasing the overall market value of the firms common stock.
Restructuring of equity and preference capital becomes complex process involving a process
of law and is a highly regulated area.
The following comes under equity restructuring:

• Alteration of share capital
• Reduction of share capital
• Buy-back of shares
EXCHANGE RATIO IN A MERGER

Typically, in a merger the acquiring firm offers its shares in exchange for the target firm’s shares. The offer
is expressed in the form of exchange ratio (or swap ratio) which is defined as the number of shares the
acquiring firm is willing to give in exchange for one share of the target firm. For example, an exchange
ratio of 0.5 means that the acquiring firm is willing to give half a share for every share of the target firm.
Bases for Determining the Exchange Ratio
What are the bases on which the exchange ratio is determined? The commonly used bases for establishing
the exchange ratio are: book value per share, earnings per share, market price per share, dividend
discounted value per share, and discounted cash flow value per share.
Book Value Per Share
The relative book values per share of the two firms may be used to determine the exchange rate. For
example, if the book value per share of the acquiring company is Rs. 25 and the book value per share of
the target company is Rs. 15, the book value based exchange ratio is (15/25). The proponents of book
value contend that it provides a very objective basis. This, however, is not a very plausible argument
because book value is influenced by accounting policies which reflect subjective judgements. There are
still more serious objections against the use of book value: Book values do not reflect changes in
purchasing power of money. Book values often are highly different from true economic values.
Earnings Per Share
Suppose the earnings per share of the acquiring firm are Rs. 5.00 and the earnings per share of the target
firm Rs. 2.00. An exchange ratio based on earnings per share will be (2/5). This means two shares of the
acquiring firm will be exchanged for five shares of the target firm.
While earnings per share reflect prima facie the earning power, there are some problems in an exchange
ratio based solely on the current earnings per share of the merging companies because it fails to take into
account the following:
While earnings per share reflect prima facie the earning power, there are some problems in an exchange
ratio based solely on the current earnings per share of the merging companies because it fails to take into
account the following:
• The difference in the growth rate of earnings of the two companies.

• The gains in earnings arising out of merger.
• The differential risks associated with the earnings of the two companies
Moreover, there is the measurement problem of defining the normal level of current earnings. The
current earnings per share may be influenced by certain transient factors like a wind fall profit, or an
abnormal labour problem, or a large tax relief. Finally, how can earnings per share, when they are
negative, be used?
Market Price Per Share
The exchange ratio may be based on the relative market prices of the shares of the acquiring firm and the
target firm. For example, if the acquiring firm’s equity shares sell for ` 50 and the target firm’s equity
shares sell for ` 10, the market price based exchange ratio is 0.2 (10/50). This means that one share of the
acquiring firm will be exchanged for five shares of the target firm.
When the shares of the acquiring firm and the target firm are actively traded in a competitive market,
market prices have considerable merit. They reflect current earnings, growth prospects, and risk
characteristics. When the trading is meagre, market prices, however, may not be very reliable and, in the
extreme case, market prices may not be existent if the shares are not traded. Another problem with
market prices is that they may be manipulated by those who have a vested interest.
Reasons for Mergers and Acquisitions

Synergistic operating economic: - synergy may be defined as V(AB) > V(A) + V(B)
The difference between the combined value and the stand value of target and Acquire is attributable to
synergy.
Net gain is the value of synergy – premium paid
Premium Paid = Price paid over the market value + other costs of integration.
Diversification: - In case of merger between two unrelated companies would lead to reduction in
business risk.
Taxation: - The provision of set off and carry forward of losses as per Income Tax Act may be another
strong reason for merger and acquisition.
Growth: - The Acquiring Company avoids delays such attached with purchasing of building, site, and
setting up of the plant and hiring personal etc.
Consolidation of Production Capacities and increasing market power: - Due to reduced competition
marketing power increases and also the production capacities are increased by combined of two or
more plants.
Exchange/Swap Ratio
If Deals is based on EPS then,
Swap Ratio = (EPS of Target) / (EPS of Acquirer)
If Deals is based on MPS then,
Swap Ratio = (MPS of Target) / (MPS of Target)

If Deal is based on Book Value per Share (BVPS) then,

Swap Ratio = (BVPS of Target) / (BVPS of Acquirer)
Minimum and Maximum Exchange Ratio

Minimum Exchange Ratio is the minimum Expectation of Target to get amount or share so that
there would be no loss to target in terms of EPS or MPS.
Maximum Exchange Ratio is the ability of acquirer to pay to target company that amount which
would do not results to lose in the value of EPS or MPS term.
S. Formula
No.
1. Maximum EPSold = Earning of Acquirer + Earning of Target + Synergy Gain
Exchange No. of Share Outstanding of Acquirer + (No. of Share
Ratio in Outstanding of Target X ER)
Terms of EPS
2. Maximum MPSold = Market Value of Acquirer + Market Value of Target +
Exchange Synergy Gain
Ratio in No. of Share Outstanding of Acquirer + (No. of Share
Terms of MPS Outstanding of Target X ER)
3. Minimum EPSold = (Earning of Acquirer + Earning of Target + Synergy
Exchange Gain) x ER
Terms of EPS Outstanding of Target X ER)
4. Minimum MPSold = (Market Value of Acquirer + Market Value of Target +
Exchange Synergy Gain) x ER
Terms of MPS Outstanding of Target X ER)
Free Float Capital

Shares Held by Public is known as free float shares.
Free Float Market Capitalization = Free Float Shares X Share Price
Non – Free Float Capital

Shares held by promoter are known as non- free float shares.
Non- free Float Market Capitalization = Share Held by Promoters X Share Price
Total Market Capitalization = Free Float Market Capitalization + Non Free Float Market
Capitalization
Accretion – Dilution Analysis
If Post Acquisition EPS increase we call deal is Accretive.

If Post Acquisition EPS decrease we call deal is dilutive.
If a high P/E Ratio Acquires a low P/E Ratio by issue of shares then Deal would be Accretive
(increase in EPS) for Acquirer and dilutive (decrease in EPS) for target.
Value of Acquisition = Post Acquisition – Pre Acquisition Value of Merged Entity
Take over
A takeover is a special form of acquisition that occurs when a company takes control of another
company without the acquired firm’s agreement. Takeovers that occur without permission are
commonly called hostile takeovers.
Acquisitions, also referred to as friendly takeovers, occur when the acquiring company has the
permission of the target company’s Board of directors to purchase and takeover the company.
Acquisition refers to the process of acquiring a company at a price called the acquisition price or
acquisition premium. The price is paid in terms of cash or acquiring company's shares or both.
As the motive is to takeover of other business, the acquiring company offers to buy the shares at a
very high premium, that is, the gaining difference between the offer price and the market price of
the share. This entices the shareholders and they sell their stake to earn quick money. This way the
acquiring company gets the majority stake and takes over the ownership control of the target
company.
Objects of Takeover
The objects of a takeover may inter alia include:
(i) To effect savings in overheads and other working expenses on the strength of combined
resources;
(ii) To achieve product development through acquiring firms with compatible products and
technological/manufacturing competence, which can be sold to the acquirer’s existing marketing
areas, dealers and end users;
(iii) To diversify through acquiring companies with new product lines as well as new market areas,
as one of the entry strategies to reduce some of the risks inherent in stepping out of the acquirer’s
historical core competence;
(iv) To improve productivity and profitability by joint efforts of technical and other personnel of
both companies as a consequence of unified control;
(v) To create shareholder value and wealth by optimum utilisation of the resources of both
companies;
(vi) To achieve economies of scale by mass production at economical costs;
(vii) To secure substantial facilities as available to a large company compared to smaller companies
for raising additional capital, increasing market potential, expanding consumer base, buying raw
materials at economical rates and for having own combined and improved research and
development activities for continuous improvement of the products, so as to ensure a permanent
market share in the industry;
(viii) To achieve market development by acquiring one or more companies in new geographical
territories or segments, in which the activities of acquirer are absent or do not have a strong
presence.
Kinds of Takeover
Takeovers may be broadly classified into three kinds:
(i) Friendly Takeover: Friendly takeover is with the consent of taken over company. In friendly
takeover, there is an agreement between the management of two companies through negotiations
and the takeover bid may be with the consent of majority or all shareholders of the target company.
This kind of takeover is done through negotiations between two groups. Therefore, it is also called
negotiated takeover.
(ii) Hostile Takeover: When an acquirer company does not offer the target company the proposal
to acquire its undertaking but silently and unilaterally pursues efforts to gain control against the
wishes of existing management.
(iii) Bailout Takeover: Takeover of a financially sick company by a profit earning company to bail
out the former is known as bailout takeover. There are several advantages for a profit making
company to takeover a sick company. The price would be very attractive as creditors, mostly banks
and financial institutions having a charge on the industrial assets, would like to recover to the
extent possible
Takeover Regulations
The SEBI Act, 1992 empowered SEBI to make substantial acquisition of shares and takeovers a
regulated activity for the first time. SEBI notified the SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 1994 in November 1994.
Being statutory in nature, violation of any of the provisions attracted several penalties. SEBI could
initiate criminal prosecution under Section 24 of the SEBI Act, 1992, issue directions under the
SEBI Act and could direct any person not to dispose off any securities acquired in violation of the
regulations or direct him to sell shares acquired in violation of the Regulations or take action
against the intermediary registered with SEBI.
The SEBI Act, 1992 also empowered SEBI to initiate adjudications and to impose fines as penalties
for certain violations of the Regulations.
SEBI acquired necessary expertise and insight into the complexities of a Takeover after
implementing the same for 2 years and thereafter formed a Committee under the Chairmanship of
Justice Bhagwati.
The terms of reference of the Committee were:

• to examine the areas of deficiencies in the existing regulations; and
• to suggest amendments in the Regulations with a view to strengthen the Regulations and make
them more fair, transparent and unambiguous and also protect the interest of investors and all
parties concerned in the acquisition process.
The Committee submitted its report in January 1997 and the SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 1997 were notified on February 20, 1997. These Regulations
primarily dealt with the issues such as consolidation of holdings, conditional offers, change in
control, formation of a Takeover Panel, competitive offers and defined substantial quantity for the
purpose of making a disclosure and for the purpose of making an open offer. Takeovers were for
the first time regulated in India in full swing. However the various provisions were again subject
to different interpretations and some of the provisions could not give the intended results.
With a view to address all the concerns raised by all concerned, the same committee was
reconstituted to review the working of the regulations and to consider suitable suggestions for
further refinement of the Regulations in the light of the experience gained so far. The reconstituted
Committee submitted its recommendations in 2002 and the Regulations went in for a major
amendment in the year 2002
.
In 2009, SEBI constituted a Takeover Regulation Advisory Committee (TRAC Committee) under
the Chairmanship of Mr. C Achutan to review the Takeover Regulations of 1997. The committee
submitted its report in 2010 and the Regulations, SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations,2011 were notified on September 23, 2011, became effective from
October 22, 2011.
The major amendments/changes were:

1. Increase in trigger limit for open offer from 15% to 25%
2. Increase in statutory open offer size from 20% of share capital to 26% of total share capital of
the company
3. Overhaul of exemptions from open offer:
Exemptions have been further categorized into the following broad heads:
a. Transactions, which trigger a statutory open offer due to substantial acquisition of shares/ voting
rights, or due to change in control
b. Transactions, which trigger a statutory open offer due to acquisition of shares/ voting rights
exceeding prescribed thresholds, provided that there is no change in control.
4. Offer pricing: The new regulations brought in the concept of Volume Weighted Average Market
Price.
5. Creeping acquisition: The New Regulations provided that an acquirer could make a creeping
acquisition of 5% annually (between April 1 to March 31 of next year) to reach 75% stake such
that the minimum public shareholding of 25% is maintained. The manner of computation of the
5% creeping acquisition limit has also been clarified.
6. Non Compete Fee : The provision of payment of non compete was done away with.
7. Recommendation of independent directors on the open offer to be published in the newspapers

in which the detailed public statement was given.
The Regulations, further sought to include the various SAT judgements, informal guidance given
and the experience gained from implementing the Takeover Regulations from the year 1994. They
further sought to align itself with the Takeover Regulations as they exist in the rest of the world.
Legal aspects of Takeover
The legislations/regulations that mainly govern takeover are as under:

1. Companies Act, 2013
2. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (The Regulations)
3. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
As far as Companies Act, 2013 is concerned, the provisions of Section 186 apply to the acquisition
of shares through a company. Section 235 and 236 of the Companies Act, 2013 lays down legal
requirements for purpose of takeover of an unlisted company through transfer of undertaking to
another company.
SEBI (SAST) Regulations, 2011 lays down the procedure to be followed by an acquirer for
acquiring majority shares or controlling interest in another company.
As per Regulation 31A (8) of SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015, if any public shareholder seeks to re-classify itself as a promoter, such a public
shareholder shall be required to make an open offer in accordance with the provisions of SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
Exception from the applicability
The regulations shall not apply to direct and indirect acquisition of shares or voting rights in, or
control over a company listed without making a public issue, on the institutional trading platform
of a recognized stock exchange
TAKEOVER OF UNLISTED COMPANIES
Section 236 of the Companies Act contains a compulsory acquisition mode for the transferee
company to acquire the shares of minority shareholders of Transferor Company.
Where the scheme has been approved by the holders of not less than nine tenth (90%) in value of
the shares of the transferor company whose transfer is involved, the transferee company, may, give
notice to any dissenting shareholders that transferee company desires to acquire their shares. The
scheme shall be binding on all the shareholders of the transferor company (including dissenting
shareholders), unless the Tribunal orders otherwise (i.e. that the scheme shall not be binding on all
shareholders).
Accordingly, the transferee company shall be entitled and bound to acquire these shares on the
terms on which it acquires under the scheme (the binding provision).
The advantage of going through the route contained in Section 235 of the Companies Act is the
facility for acquisition of minority stake. The transferee company shall give notice to the minority
dissenting shareholders and express its desire to acquire their shares within a period of 4 months
after making an offer as envisaged under Section 235 of the Act.
When a Company intends to takeover another Company through acquisition of 90% or more in
value of the shares of that Company, the procedure laid down under Section 235 of the Act could
be beneficially utilized.
When one Company has been able to acquire more than 90% control in another Company, the
shareholders holding the remaining control in the other Company are reduced to a minority. They
do not even command a 10% stake so as to make any meaningful utilization of the power. Such
minority cannot even call an extraordinary general meeting under Section 100 of the Act nor can
they constitute a valid strength on the grounds of their proportion of issued capital for making an
application to the Tribunal under Section 241 of the Act alleging acts of oppression and/or
mismanagement. Hence the statute itself provides them a meaningful exit route.
The advantage of going through the route is the facility for acquisition of minority stake. But even
without going through this process, if an acquirer is confident of acquiring the entire control, there
is no need to go through Section 235 of the Act. It is purely an option recognized by the statute.
The merit of this scheme is that without resort to tedious court procedures the takeover is affected.
Only in cases where any dissentient shareholder or shareholders exist, the procedures prescribed
by this section will have to be followed. It provides machinery for adequately safeguarding the
rights of the dissentient shareholders also.
Section 235 lays down two safeguard in respect of expropriation of private property (by
compulsory acquisition of majority shares). First the scheme requires approval of a large majority
of shareholders.
Second the Tribunal’s discretion to prevent compulsory acquisition.
The following are the important ingredients of the Section 235 route:
• The Company, which intends to acquire control over another Company by acquiring share, held
by shareholders of that another Company is known under Section 235 of the Act as the “Transferee
Company”.
• The Company whose shares are proposed to be acquired is called the “Transferor Company”.
• The “Transferee Company” and “Transferor Company” join together at the Board level and come
out with a scheme or contract.
• Every offer or every circular containing the terms of the scheme shall be duly approved by the
Board of Directors of the companies and every recommendation to the members of the transferor
Company by its directors to accept such offer. It shall be accompanied by such information as
provided under the said Act. The circular shall be sent to the dissenting shareholders in Form No:
CAA 14 to the last known address of the dissenting shareholder.
• Every offer shall contain a statement by or on behalf of the Transferee Company, disclosing the
steps it has taken to ensure that necessary cash will be available. This condition shall apply if the
terms of acquisition as per the scheme or the contract provide for payment of cash in lieu of the
shares of the Transferor Company which are proposed to be acquired.
• Any person issuing a circular containing any false statement or giving any false impression or
containing any omission shall be punishable with fine, which may extend to five hundred rupees.
• After the scheme or contract and the recommendation of the Board of Directors of the transferor
Company, if any, shall be circulated and approval of not less than 9/10th in value of “Transferor
Company” should be obtained within 4 months from the date of circulation. It is necessary that the
Memorandum of Association of the transferee company should contain as one of the objects of the
company, a provision to take over the controlling shares in another company. If the memorandum
does not have such a provision, the company must alter the objects clause in its memorandum, by
convening an extraordinary general meeting. The approval is not required to be necessarily
obtained in a general meeting of the shareholders of the Transferor Company.
• Once approval is available, the ‘Transferee Company’ becomes eligible for the right of
compulsory acquisition of minority interest.
• The Transferee Company has to send notice to the shareholders who have not accepted the offer
(i.e.dissenting shareholders) intimating them the need to surrender their shares.
• Once the acquisition of shares in value, not less than 90% has been registered in the books of the
transferor Company, the transferor Company shall within one month of the date of such
registration,
inform the dissenting shareholders of the fact of such registration and of the receipt of the amount
or other consideration representing the price payable to them by the transferee Company.
• The transferee Company having acquired shares in value not less than 90% is under an obligation
to acquire the minority stake as stated aforesaid and hence it is required to transfer the amount or
other consideration equal to the amount or other consideration required for acquiring the minority
stake to the transferor Company. The amount or consideration required to be so transferred by the
transferee Company to the transferor company, shall not in any way, less than the terms of
acquisition offered under the scheme or contract.
• Any amount or other consideration received by the Transferor Company in the manner aforesaid
shall be paid into a separate bank account. Any such sums and any other consideration so received
shall be held by the transferor Company in trust for the several persons entitled to the shares in
respect of which the said sums or other consideration were respectively received.
The takeover achieved in the above process through Section 235 of the Act will not fall within the
meaning of amalgamation under the Income Tax Act, 1961 and as such benefits of amalgamation
provided under the said Act will not be available to the acquisition under consideration. The
takeover in the above process will not enable carrying forward of unabsorbed depreciation and
accumulated losses of the transferor Company in the transferee Company for the reason that the
takeover does not result in the transferor Company losing its identity
.
Check-list
Transferor Company (Documents etc. involved in this process):
1. Offer of a scheme or contract from the transferee company

2. Minutes of Board meeting containing consideration of the offer and its acceptance or rejection
3. Notice calling general meeting
4. Form CAA 14 circulated to the members
5. Minutes of general meeting of the company containing approval of the offer by statutory
majority in
value and in numbers also, if required
6. Court order, if any
7. Register of Members
8. Notice sent by the transferee company to dissenting shareholders for acquiring their shares
9. Duly filled in and executed instrument(s) of transfer of shares held by the dissenting
shareholders
10. Bank Pass Book or Statement of Account in respect of the amount deposited in the special
bank
account to be kept in trust for the dissenting shareholders
11. Annual Report
Transferee Company (Documents etc. involved in this process):

1. Minutes of Board meeting containing consideration and approval of the offer sent to the
transferor company
2. Offer of a scheme or contract sent to the transferor company
3. Notice to dissenting shareholders if any, of the transferor company
4. Notice to the remaining shareholders of the transferor company, who have not assented to the
proposed acquisition, if any
5. Form No: CAA14 received from the transferor company, which has been circulated to its
members by that company
6. Minutes of general meeting of the company containing approval of the shareholders to the offer
of scheme or contract sent to the transferor company
7. Court order, if any
8. Register of Investments
9. Duly filled in and executed instrument(s) of transfer for shares held by the dissenting
shareholders
10. Balance Sheets showing investments in the shares of the transferor company
TAKEOVER OF LISTED COMPANIES
Takeover of companies whose securities are listed on one or more recognized stock exchanges in
India is regulated by the Securities and Exchange Board of India (Substantial Acquisition of Shares
and Takeovers) Regulations, 2011.
Therefore, before planning a takeover of a listed company, any acquirer should understand the
compliance requirements under the Regulations and also the requirements under the SEBI (LODR)
Regulations, 2015 and the Companies Act, 2013. There could also be some compliance
requirements under the Foreign Exchange Management Act, 1999 if the acquirer were a person
resident outside India.
As per Regulation 38, the listed entity shall comply with the minimum public shareholding
requirements as specified in Rule 19(2) and Rule 19A of the Securities Contracts (Regulations)
Rules, 1957 in the manner as specified by the Board from time to time. In other words, the listed
entity shall ensure that the public shareholding shall be maintained at 25% of the total paid up
share capital of the company failing which the company shall take steps to increase the public
shareholding to 25% of the total paid up share capital by the methods as specified in Rule 19(2)
and Rule 19A of the Securities Contracts (Regulations) Rules, 1957.
This provision shall not apply to entities listed on institutional trading platform without making a
public issue.
TAKEOVER BIDS
“Takeover bid” is an offer to the shareholders of a company, who are not the promoters of the
company or the sellers of the shares under an agreement, to buy their shares in the company at the
offered price within the stipulated period of time. It is addressed to the shareholders with a view
to acquiring sufficient number of shares to give the Offer or Company, voting control of the target
company.
A takeover bid is a technique, which is adopted by a company for taking over control of the
management and affairs of another company by acquiring its controlling shares.
Type of takeover bids
A takeover bid may be a “friendly takeover bid” or a “hostile takeover bid”. Bids may be
mandatory/competitive bids.
Mandatory Bid
The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011, require acquirers
to make bids for acquisition of certain level of holdings subject to certain conditions. A takeover
bid is required to be made by way of a public announcement issued to the stock exchanges,
followed by a Detailed Public Statement in the newspapers. Such requirements arise in the
following cases:
(a) for acquisition of 25% or more of the shares or voting rights;
(b) for acquiring additional shares or voting rights to the extent of 5% of the voting rights in any
financial
year beginning April 01, if such person already holds not less than 25% but not more than 75% or
90% of the shares or voting rights in a company as the case may be;
(c) for acquiring control over a company
DEFENSE STRATEGIES TO TAKEOVER BIDS
A hostile bid made directly to the shareholders of the target company with or without previous
overtures to the management of the company has become a means of creating corporate
combinations. Hence, there has been considerable interest in developing defense strategies by
actual and potential targets. Defenses can take the form of fortifying oneself, i.e., making the
company less attractive to takeover bids or more difficult to takeover and thus discourage any
offers being made. Defensive actions are also resorted to in the event of perceived threat to the
company ranging from early intelligence that an acquirer is accumulating shares.
I FINANCIAL DEFENSE MEASURES
1. Adjustments in Asset and Ownership Structure
Firstly, consideration has to be given to developing defense structures that create barriers specific
to the bidder. These include purchase of assets that may cause legal problems, purchase of
controlling shares of the bidder itself, and sale to their party of assets which made the target
attractive to the bidder and issuance of new securities with special provisions conflicting with the
aspects of the takeover attempt.
It must however be borne in mind that as per the Regulation 26(2) of the SEBI (SAST) Regulations,
2011,the target company cannot alienate its assets, make any material borrowings, issue any new
shares with voting rights or terminate any material contract during the offering period (which
commences once the public
announcement is made) except with the approval of shareholders by way of a special resolution
passed by Postal Ballot. Hence it would be almost impossible to bring about adjustments in Assets
and Ownership structure in India.
(i) A second common method is to create a consolidated vote block allied with target management.
Thus securities are issued through private placements to parties friendly or in business alliance
with management or to the management itself. Moreover another method can be to repurchase
publicly held shares to increase an already sizeable management block in place.
It must however be borne in mind that as per the Regulation 26(2) of the SEBI (SAST) Regulations,
2011, the target company cannot, issue any new shares with voting rights or terminate any material
contract during the offering period (which commences once the public announcement is made)
and can also not make a buy-back of shares from the public shareholders except with the approval
of shareholders by way of a special resolution passed by Postal Ballot. Hence it would be almost
impossible to bring about adjustments in Assets and Ownership structure in India. However in
anticipation of a perceived threat of takeover, the management can issue shares or convertible
securities beforehand so that they can be converted once the public announcement for an open
offer is made.
(ii) A third common theme has been the dilution of the bidders vote percentage through issuance
of new equity shares. However, this option will not work in India due to the strict procedures laid
down in Regulation 26(2) of the SEBI (SAST) Regulations, 2011.
(iii) The “Crown Jewel” Strategy
The central theme is this strategy is to divest the most coveted asset by the bidder, commonly
known as the “crown jewel”. Consequently the hostile bidder is deprived of the primary intention
behind the takeover bid. A variation of the crown jewel strategy is the more radical “scorched earth
approach”, vide which approach, the target sells off not only the crown jewel, but also properties
to diminish its worth. Such a radical step may however be self-destructive and unwise in the
company’s interest.
However as per the Companies Act, 2013, selling of whole or substantially the whole of its
undertaking requires the approval of the shareholders in a general meeting by way of a special
resolution and Regulation 26(2) of the SEBI (SAST) Regulations, 2011, the target company cannot
alienate any of its material assets during the offering period (which commences once the public
announcement is made) and can also not make a buy-back of shares from the public shareholders
except with the approval of shareholders by way of a special resolution passed by Postal Ballot.
Hence it would be almost impossible to use the “Crown Jewel” Strategy as a defense mechanism
in India.
(iv) The Packman Defence
This strategy although unusual attempts to purchase the shares of the raider company. This is
usually the scenario if the raider company is smaller than the target company and the target
company has a substantial cash flow or liquidable asset.
Regulation 26(2) of the SEBI (SAST) Regulations, 2011, however prohibits the target company to
enter into any agreement which is not in the ordinary course of business during the offering period
(which commences once the public announcement is made) except with the approval of
shareholders by way of a special resolution passed by Postal Ballot. Hence it would be almost
impossible to use the “Packman Defense” Strategy as a defense mechanism in India.
(v) Targeted Share Repurchase or “Buy-back”
This strategy is one in which the management of the target company uses up a part of the assets
for the company on the one hand to increase its holding and on their hand it disposes of some of
the assets that make the target company unattractive to the raider. The strategy therefore involves
a creative use of buyback of shares to reinforce its control and detract a prospective raider. But
“Buyback” would involve the use of the free reserves of the company and would be an expensive
proposition for the target company. Further as per Regulation 26(2) of the SEBI (SAST)
Regulations, 2011, the target company cannot implement a buy-back during the offer period except
with the approval of shareholders by way of a special resolution passed by Postal Ballot. Hence it
would be almost impossible to use this defense mechanism also in India.
(vi) Golden Parachutes
These are separation clauses of an employment contract that compensate managers who lose their
jobs under a change of management scenario. The provision usually calls for a lump-sum payment
or payment over a specified period at full and partial rates of normal compensation. Target
Companies invoke this provision and pay off a huge compensation to large number of employees
so as to make themselves unattractive to the raider. However section 192 and Section 202 of the
Companies Act, 2013 provide for compensation to be paid for loss of office only to a Managing
Director, Whole Time Director or a Manager and not the entire senior management, as is the
practice in the United States of America. Hence this defense mechanism is of no consequence in
India.
II. ANTI TAKEOVER AMENDMENTS OR “SHARK REPELLANTS”
An increasingly used defense mechanism being used is anti-takeover amendments to the

company’s constitution or articles of association, popularly called as “shark repellants”. This
practice consists of changing the articles of associations, regulations, bye-laws, etc. to be less
attractive to the raider / hostile bidder. This again may not work out in India as any change to the
Articles of Association or the Memorandum of Association would require approval of the
shareholders.
i. Supermajority Amendments
These amendments require shareholder approval by at least 2/3rds vote and sometimes as much as
90% of the voting power of outstanding capital for all transactions involving change of control. In
most existing cases, however the super majority agreements have a board out clause which
provides the board with the power to determine when and if the super majority provisions will be
in effect. Pure or inflexible super majority provisions would seriously limit the management’s
scope of options and flexibility in takeover negotiations.
ii. Classified Boards
Another type of anti-takeover amendments provides for a staggered or classified board of directors
to delay effective transfer and control in a takeover. The much touted management rationale in
proposing a classified board is to ensure continuity of policy and experience in the USA. The legal
position of such classified or staggered boards is quite flexible. An example is when a 9 member
board may be divided into 3 categories,with only 3 members standing for election to a three year
term each, such being the modalities of the retirement by rotation. Thus a new majority shareholder
would have to wait for at least 2 AGMs to gain control of the Board of Directors. Section 152 of
the Companies Act, 2013 warrants that 1/3rd of the directors whose office is determinable by
retirement will retire. Therefore continuing the example of 9 directors, 3 can be made permanent
directors by amending the Articles and therefore the acquirer would have to wait for at least 3
AGMs to gain control over the Board. However the company may by an ordinary resolution
remove a director before the expiration of his period of officer. Thus any provision in the Articles
of the Company or any agreement between the company and a director by which the director is
rendered irremovable from office by an ordinary resolution would be void and contrary to the Act.
iii. Authorisation of Preferred Stock
The Board is authorised to create a new class of securities with special voting rights. This security,
typically preferred stock may be issued to a friendly party in a control context. This is referred to
as issuance of Shares with Differential Voting Rights, which is subject to restrictions under the
Companies Act, 2013 and SEBI (ICDR) Regulations, 2009 and hence has been rendered
unattractive over a period of time.
iv. Poison Pill Defenses
This is a controversial but popular defense mechanism. These pills provide their holders with
special rights exercisable only after a period of time following the occurrence of a triggering event.
These rights take several forms but all are difficult and costly to acquire control of the issuer or
the target company. Poison pills are generally adopted by the Board of Directors without
shareholder approval. Usually the rights provided by the poison pill can be altered quickly by the
Board or redeemed by the Company any time after they become exercisable following the
occurrence of the triggering event. These provisions force the acquirer to negotiate directly with
the target company’s board and allow some takeover bids to go through. Many proponents of
this mechanism argue that this enhances the ability of the Board of Directors to bargain for a fair
price.
CROSS BORDER TAKEOVERS
Cross Border Takeover is a much sort after term in recent years. Competitiveness among the
domestic firms forces many businesses to go global. There are various factors which motivate
firms to go for global takeovers.
Apart from personal glory, global takeovers are often driven by market consolidation, expansion
or corporate diversification motives. Also, financial, accounting and tax related matters inspire
such takeovers.
Expansion and diversification are one of the primary reasons to cross the border as the domestic
markets usually do not provide the desired growth opportunities. Another main reason for cross
border takeovers is to attain monopoly. Acquirer company is always on the lookout for companies
which are financially vulnerable but have untapped resources or intellectual capital that can be
exploited by the purchaser.
Global takeovers are complex processes. Despite some harmonized rules, taxation issues are
mainly dealt within national rules, and are not always fully clear or exhaustive to ascertain the tax
impact of a crossborder merger or acquisition. This uncertainty on tax arrangements sometimes
require seeking of special agreements or arrangements from the tax authorities on an ad hoc basis,
whereas in the case of a domestic deal the process is much more deterministic.
Gross-border takeover bids are complex transactions that may involve the handling of a significant
number of legal entities, listed or not, and which are often governed by local rules (company law,
market regulations, self-regulations, etc.). Not only a foreign bidder might be hindered by a
potential lack of information, but also some legal complexities might appear in the merger process
resulting in a deadlock, even though the bid would be ‘friendly’. This legal uncertainty may result
in a significant execution risk and act as a major hurdle to cross-border consolidation.
ANTI-TAKOVER DEFENSES
LEVERAGED BUYOUTS
A leveraged buyout involves transfer of ownership consummated mainly with debt. While some
leveraged buyouts involve a company in its entirety, others involve a business unit of a company.
Often the business unit is bought out by its management and such a transaction is called a
management buyout (MBO). After the buyout, the company (or the business unit) invariably
becomes a private company.
To illustrate the essence of a leveraged buyout transaction, a simple example may be given. Trilok
Limited has three divisions, namely the plastics division, the textiles division, and the garments
division. Trilok is interested in divesting the plastics division. While the assets of this division
have a replacement cost of Rs.140 million, they will fetch only Rs. 90 million if liquidated.
Trilok is willing to sell the division if it gets Rs. 100 million. Four key executives of the plastics
division are keen on acquiring it through a leveraged buyout operation. They are willing to invest
Rs. 8 million. They approach Financial Engineering Limited (FEL), a merchant banking firm, for
assistance.
FEL prepares projections for the plastics division on the assumption that it will be run as an
independent company by the four key executives. FEL figures out that the cash flows of this
operation would support a debt of Rs. 100 million. FEL finds a finance company which is willing
to provide debt finance to the extent of Rs 85 million for the project. FEL also locates a private
investor who is prepared to invest Rs 7 million in the equity of this project. The plastics division
of Trilok is acquired by an independent company, run by the four key executives, which is financed
through by Rs 85 million of debt and Rs. 15 million of equity (Rs.8 million is contributed by the
four key executives and Rs 7 million by the private investor).
What Does Debt Do?
A leveraged buyout entails considerable dependence on debt. What does it imply? Debt has a
bracing effect on management, whereas equity tends to have a soporific influence. Debt spurs
management to perform, whereas equity lulls management to relax and take things easy. As G.
Bennett Stewart III and David M. Glassman put it: “Debt is ‘just-in-time’ financial system. The
precise obligation to repay it is another mechanism to squeeze operating inefficiencies. Leaving
no margin the consequences of making a mistake ensures that fewer mistakes are made.”9 In a
similar vein they add: “Equity is soft, debt hard. Equity is forgiving, debt insistent. Equity is a
pillow, debt a sword. Equity and debt are the yin and yang of corporate finance.
Risks and Rewards
The sponsors of a leveraged buyout are lured by the prospect of wholly (or largely) owning a
company or a division thereof, with the help of substantial debt finance. They assume considerable
risks in the hope of reaping handsome rewards. The success of the entire operation depends on
their ability to improve the performance of the unit, contain its business risks, exercise cost
controls, and liquidate disposable assets. If they fail to do so, the high fixed financial costs can
jeopardise the venture.
How Is Value Created?
Three factors, in the main, seem to help create value in an LBO: Operational improvements
increase the enterprise value. Operating cash flows are used to repay debt, thereby increasing the
equity shareholders’ share of enterprise value. The interest on debt brings tax shield.
What Makes a Good LBO Candidate
The following characteristics of a firm or division make it a good LBO candidate.
Good management team.

Stable cash flows.
Potential for operational improvement.
Flexibility in disposing redundant assets.
Limited capital expenditure needs.
Ease of exit.
EQUITY CARVEOUT
In an equity carveout, a parent company sells a portion of its equity in a wholly owned subsidiary.
The sale may be to the general investing public or to a strategic investor.
An equity carveout differs from a spin off in the following ways: (a) In a spinoff the shares of the
spun off company are distributed to the existing shareholders of the parent company, whereas in
an equity carveout the shares are sold to new investors. (b) An equity carveout brings cash infusion
to the parent company, whereas a spin off does not.
Equity carveouts are undertaken to bring cash to the parent and to induct a strategic investor in a
subsidiary.
Value of Target Firm/M&A Valuation :
M&A is a corporate strategy that may increase value for the acquirer by creating an important
value driver known as Synergies (ways to increase profit/earnings through an acquisition),
among other reasons. Synergies can arise from an M&A transaction for a variety of reasons:
• Increase and diversify sources of revenue by the acquisition of new and complementary
product and service offerings (Revenue Synergies)
• Increase production capacity through acquisition of workforce and facilities (Operational
Synergies)
• Increase market share and economies of scale (Revenue Synergies/Cost Synergies)
• Reduction of financial risk and potentially lower borrowing costs (Financial Synergies)
• Increase operational efficiency and expertise (Operational Synergies/Cost Synergies)
• Increase Research & Development expertise and programs (Operational Synergies/Cost
Synergies)
The acquisition of another company may also be defensive in nature. For example, a large
company may wish to acquire a small but growing company if the small company has a
substantial competitive advantage over the large company, such as an important technology or
patent, or superior product offering. This may protect the acquirer from serious competitive
consequences, as the small company may over time be able to grow on its own and eat into the
large company’s business.
MERGER ANALYSIS
Investment bankers put together merger models to analyze the financial profile of two combined
companies. The primary goal of the investment banker is to figure out whether the buyer’s earnings
per share (EPS) will increase or decrease as a result of the merger. An increase in expected EPS
from a merger is called Accretion (and such an acquisition is called an Accretive Acquisition), and
a decrease in expected EPS from a merger is called Dilution (and such an acquisition is called a
Dilutive Acquisition).
A Merger Consequences Analysis consists of the following key valuation outputs:
• Analysis of Accretion/Dilution and balance sheet impact based on pro forma acquisition
results
• Analysis of Synergies
• Type of Consideration offered and how this will impact results (i.e., Cash vs. Stock)
• Goodwill creation and other Balance Sheet adjustments
• Transaction fees
These will all be encapsulated in the M&A Mod. An investment banker begins to evaluate a
potential M&A transaction by referring to a set of questions that will likely include the
following:
Who is the Seller?
Publicly traded stock, or privately held?
Insider ownership or sizable public float (i.e., is a large portion of the company’s shares available
for sale in the open market)?
Who are the potential Buyers?
Strategic Buyer (an existing company able to gain from potential synergies)?
Financial Sponsor (a Private Equity firm looking to generate an attractive return via a Leveraged
Buyout)?
What is the context of the transaction?
Privately negotiated sale or auction?
Hostile or friendly takeover?
What are the market conditions?
Acquisition currency (Cash or Equity)?
Historical premiums paid for Comparable Transactions?
There are also various types of M&A transactions that can occur, both in terms of the dynamics
of the transaction and the structuring of it.
DETERMINING THE PURCHASE PRICE AND CONSIDERATION

The Buyer in an M&A transaction intends to benefit from transaction by increasing the value
available to its existing shareholders (otherwise, the shareholders are unlikely to approve it). By
acquiring all of the shares of the Target company (or at least enough shares to gain control of it),
the buyer is willing to pay a Control Premium. A Control Premium is the price paid above
market value for a Target public company in order to gain control of the company. Here is a
simple example of the control premium:
Company X offers to acquire Company Y for $50 per share. The current share price of Company
Y prior to the announcement of the offer price is $40. Therefore, Company X offers a 25%
premium over the current market price ($50 ÷ $40 – 1) to gain control of Company Y.
A critical component to evaluating an M&A transaction is to determine the Purchase Price for
the Target company. In particular, how much of a Control Premium should be paid for the Target
(relative to the current valuation of the target)? One very important method is to look at recent
Comparable (Precedent) Transactions to determine how much of a premium has been paid for
ownership of other, similar companies in recent M&A transactions. Other methods used to
establish a fair value for a target company in an M&A transaction include:
• Comparable Company Analysis
• Discounted Cash Flow Analysis
• Accretion/Dilution Analysis
Typically, all of these valuation methods will be used to value the equity of the target company.
These methods will hopefully lead to a reasonable, narrow range of Purchase Prices and Control
Premiums for the Target; it will then be up to the management of both the Buyer and Target
(along with their respective M&A investment banking advisors) to argue for and agree upon a
precise price/premium.
An additional, important issue is the type of consideration being offered to the Seller’s
shareholders. The Buyer can offer Cash, Equity (shares of the Buyer’s common stock) or a
combination of both as the consideration for the Purchase Price. Which should the Buyer use?
Typically, if the Buyer’s current stock price is considered undervalued relative to its peers, the
Buyer may decide to not use Equity as consideration, because it would have to give the
stockholders of the Target a relatively large number of shares to acquire the company. On the
flip side, the Target shareholders may want to receive Equity consideration in this case, because
they might feel it is more valuable than receiving Cash.
Conversely, if the Buyer feels that its current stock price is trading at high levels, the Buyer will
likely want to use Equity for the consideration of the Purchase Price, because issuing new stock
for the transaction is relatively inexpensive (i.e., the stock has a high value in dollar terms). The
Target, meanwhile, might be hesitant to receive the Equity as consideration in this case;
depending on the terms of the deal, the Seller’s shareholders may end up suffering a loss on the
sale relative to Cash consideration in the event that the Buyer’s stock price falls between the time
that the deal is announced and the time that the acquisition is completed (usually several months,
but in some cases closing can take as long as a year).
As you can see, finding a combination of consideration that is agreeable to both the Buyer and
the Seller is an important part of structuring the deal.
TRANSACTION ASSUMPTIONS
An important step in building an M&A Model is to make assumptions about important
parameters affecting the deal, and as a vital step in determining a feasible range for the Purchase
Price/Control Premium:
• Current Share Price & Number of Shares Outstanding for the Buyer
• Current valuation information for the Seller
• Expected Purchase Price/Control Premium for the Seller in the proposed transaction
• Portion of consideration arising from Equity/Cash
• M&A transaction fees
• Financing Fees from new Equity and/or Debt issuance
• Expected interest rate on new Debt
Below is an example of a simple transaction assumptions tab from a M&A Model, in which a
Purchase Price range is calculated, as well as an exact, proposed Purchase Price.
Valuation of M&A overview

given. In-depth not covered
, Enough !
☺
===================================================================

Mergers & Aquisitions

Uploaded by

Copyright:

Available Formats

Mergers & Aquisitions

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Mergers & Aquisitions

Uploaded by

Copyright:

Available Formats

III AFA UNIT-4 MERGERS & ACQUISITIONS ADV FM NOTES-2020

Corporate Restructuring is an expression that connotes a restructuring process undertaken by business

• To enhance shareholders value

MERGERS AND ACUISITIONS

Purchase of Division or Plant

Sale of Equity Stake

REASONS FOR MERGERS

Economies of Vertical Integration

Utilisation of Surplus Funds

Dubious Reasons for Mergers

Lower Financing Costs

1. Examination of Object Clauses -The memorandum of association of both the companies

5. Despatch of Notice to Shareholders and Creditors In order to convene the meeting of

6. Holding of Meetings of Shareholders and Creditors A meeting of shareholders should be held

Recent Mergers and Acquisition

Corporate Restructuring in India is governed by the following Acts, Rules, etc.:

• Reliance Industries demerged to Reliance Industries and Reliance Communications Ventures

Split-offs: It is a process of reorganizing a corporate structure whereby the capital stock of a

• It helps the business to improve its poor performance.

Reasons for Divestitures

• Huge divisional losses

The reason for reverse merger is:

• Economies of scale of production

• Restructuring of the long-term unsecured borrowings can be in form of public deposits

It is a process of reorganizing the equity capital. It includes a reshuffling of the shareholders

The following comes under equity restructuring:

EXCHANGE RATIO IN A MERGER

Bases for Determining the Exchange Ratio

Book Value Per Share

Earnings Per Share

• The difference in the growth rate of earnings of the two companies.

Market Price Per Share

Reasons for Mergers and Acquisitions

Net gain is the value of synergy – premium paid

If Deals is based on EPS then,

Swap Ratio = (EPS of Target) / (EPS of Acquirer)

If Deals is based on MPS then,

Swap Ratio = (MPS of Target) / (MPS of Target)

If Deal is based on Book Value per Share (BVPS) then,

Minimum and Maximum Exchange Ratio

Free Float Capital

Free Float Market Capitalization = Free Float Shares X Share Price

Non – Free Float Capital

Accretion – Dilution Analysis

If Post Acquisition EPS increase we call deal is Accretive.

Value of Acquisition = Post Acquisition – Pre Acquisition Value of Merged Entity

The objects of a takeover may inter alia include:

(vi) To achieve economies of scale by mass production at economical costs;

Takeovers may be broadly classified into three kinds:

The terms of reference of the Committee were:

The major amendments/changes were:

7. Recommendation of independent directors on the open offer to be published in the newspapers

Legal aspects of Takeover

The legislations/regulations that mainly govern takeover are as under:

Exception from the applicability

TAKEOVER OF UNLISTED COMPANIES

Second the Tribunal’s discretion to prevent compulsory acquisition.

Transferor Company (Documents etc. involved in this process):

1. Offer of a scheme or contract from the transferee company