m&a & corp restructuring

8/4/2019 M&a & Corp Restructuring

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MERGERS, ACQUISITIONS &

CORPORATE RESTRUCTURING

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Introduction

Terminology: Merger and Acquisition

Its usually used to describe the fusing together oftwo or more entities, whether voluntary or enforced.

Merger:

Two entities join together to submerge their separateidentities into a new entity.

Acquisition:1. One entity acquires a majority share-holding in

another, while the identity remain in existence. Itsalso referred astake over2. Often the term Merger is used for T/O, because of

cultural impact on acquired entity no one likes to betaken over


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Types of Merger

1. Horizontal Integration: Merger of entities in same line ofbusiness combines.

2. Vertical Integration:Acquisition of one entity by another,which is at different level in the chain of supplyA. Forward Integration: Near to customer

B. Backward Integration: Near to manufacturer (manufacturing)

3. Conglomerate: Two companies in unrelated businessescombine.

Why do merger happen ???

Synergy : NPV(AB) > NPV(A) + NPV(B) (or 2 + 2 = 5)


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Reason for M&A

Basic: Maximize shareholders wealth/value

Reasons:1. Increase market share Power: Competitor merge

(Tata Sky & Reliance Big TV)2. Economies of scale: Bigger company, Duplication avoided (Big Bazaar

with Subhiksha)

3. Combining complementary needs: Unique products but laketechnical skills to market on large scale (JJMI Imports, they dontmanufacture). Both entities gain something extra.

4. Improving efficiency: Lucrative market, But poor management (May bmgr like u MBA)or inefficient operation.

5. Lack of profitable investment Opportunity (Surplus Cash):

Doesnt want to pay out surplus as dividend & need place to invest.6. Tax Relief: Unclaimed loss (Income Tax - can be setoff within 8 year)7. Reduce Competition: Caution- Shouldnt fall foul of the competition

commission8. Asset stripping: Even I dont know this ???? Satyam & Maytas

Ghotala.


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-ve Comments on reason for M&A

1. Diversification, to reduce risk: Acquiring an entity in adifferent line of activity may diversify risk, for the entity.However, this is irrelevant to the Shareholder Because, theycan do diversification by investing in more than one entity.Hence, this doesnt maximize SH value.

2. Share of the target entity are undervalued: Although this isagainst the efficient markets theory (every one is smart). Theshareholders of the entity planning the T/O would derive as suchbenefit (at a lower administration cost) from buying suchundervalued shares themselves.


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Defenses against takeover

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Before the Bid:

Any listed entity needs to be aware of the possibility of a bid at alltimes. There are no of ways, by which a management board can protectthe entity. They are

1. Communicating effectively with shareholders: Have a publicrelation officer specializing in financial matters liaising withstockbrokers, keeping analyst fully informed and speaking tomedia/journalists.

2. Poison pills: Convert pref. share into equity share; sell attractiveassets to reduce the lucrativeness of acquisition.

3. Pacman strategy: The target entity makes counter offer to bidder.

This is possible, if target is strong & financial sound company.4. Shark repellent Super majority: AOA is changed to require a

high % of shares to approve an acquisition or merger Say 80%5. High asset values: Fixed assets are revalued to current value (FMV

IFRS) to ensure that SH are aware of true value per share.6. The right SH: Managing SH to ensureRightSH are on board.


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Defenses against takeover

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After the Bid:

1. Rejection letter: Having received the bidders offer doct., thetarget company must issue any reply to SH within 14 days. In thatmajority of SH may reject the offer.

2. Profit forecast: Poor profit performance can be compensated bypromising high future profit. (UK: Wellcome brought forward theirfinancial results when attack from Glaxo). Sheikh Chilli ???

3. Attacking the bidder: RNRL (ADAG) way of doing mediacampaigning & attack bidder. Concentrating on Biddersmanagement style, overall strategy, method of increasing EPS,dubious A/c policies and lack of capital investments.

4. White Knight: Ask new, more acceptable bidder could present

itself as a White knightto the board of target. This happens onthe request of target company.

5. Competition commission: See Govt. Intervention by bringing inthe competition commission. For this to be workable, it should beproved that T/O is against public interest.


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Methods of payment for an acquisition

1. Cash: Any one needs explanation on this ???

2. Share exchange: Large T/O always involves an exchange ofshares. SH of target entity are given shares in acquiring entitybased on exchange ratio.

3. Other: Debt Finance: raising new debt and paying forpurchase consideration. However, this increase gearing (increasein financial risk).

4. Earn-out arrangements: Initial amount is paid (part of value)

and balance is paid, if achieved specified performance targets.


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Example 1

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Entity A Entity BMarket price per share 75 15

Nos. of shares 100,000 60,000

Market value of company 7,500,000 900,000

The cost of merger: cash

If A intends to pay`

12 lakh - cash for B, what is the cost premium, ifa) The share price does not anticipate merger;b) The share price includes a speculation element of`2 per share ?

Answer:a) The share price accurately reflects the true value of the entity (in theory).

Therefore, the cost to the bidder is simply:`1,200,000 `900,000, i.e.`300,000. The entity is paying 3 lakh for the identified benefit of merger.

b) The cost is`300,000 + (60,000 X 2), i.e.`420,000. The entity istherefore really worth only 13 X`60,000 =`780,000. Anything addition

over this is premium paid to T/O


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Example 2

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Entity A Entity B

Market price per share 75 15Nos. of shares 100,000 60,000

Market value of company 7,500,000 900,000

The cost of merger: Share exchange

1. If A offers 16,000 shares (` 12 L/75) instead of`12 lakh cash. The premiumwould be`300,000, but because Bs SH will own part of A, they will benefit

from any future gains of the merged entity. Their share will be

(16,000/(16,000+100,000), i.e. 13.8%2. Suppose that the benefit of the merger have been identified by A to have a

present value of 400,000 (i.e. A thinks that B is worth`900,000 +`400,000,or`1 300 000). Therefore the combined entity of A & B is worth:`7,500,000+`1,300,000, or`8,800,000.

Q : What is the true cost of merger to the acquired SH ???

A B

Propotion of ownership in merged entity 86.20% 13.80%

Market Value: 8.8 L X propn of ownership 7,585,600 1,214,400

Nos of shares currently in issue 100,000 60,000

Price per share 75.86 20.24

Estimate of post acquisition prices


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Example 2 (cond)

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What we are attempting to do here is to value the share in the entitybefore the merger is completed, based on estimates of what the

entity will be worth after the merger.

The value also recognizes the split of the expected benefit, whichwill accrue to the combined form once the merger has taken place(Synergy).

`

60,000 share in B @ 20.2 A 1,212,000

Less: Current market value B 900,000

Benefit being paid to B's SH A-B 312,000

The true cost can now be calculated:


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Reasons why M&A fail

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1. The fit/lack of fit syndrome: Good fit of product or services, but a

serious misfit in management style or corporate structure.2. Lack of industrial or commercial fit: In Horizontal of vertical T/O, wheretarget entity turns out, not to have the product range or industrial positionthat acquirer anticipated.

3. Lack of goal congruence: Goal mismatch, The treatment of the targetentity might take away benefit of an otherwise excellent acquisition.

(Marriage of highly qualified people)4. Cheap purchase: The turn aroundcost of T/O at what seems to be a

good price may well turn out to be a high multiple of that price amt ofresources like cash & management time could also damage the acquirerscore business.

5. Paying too much: Price paid beyond that which the acquirer consider

acceptable to increase satisfactory the long term wealth ofits SH.6. Failure to integrate effectively: Acquirer should have clear plan on

How to integrate, level of autonomy to be granted. Such plan should coveraspects like Differences in management style, incompatibility in datainformation system and opposition by target company staff.

7. Inability to manage change: T/O is change, which needs to be

managed. Radical change from established routine.


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Post-acquisition value enhancement strategies

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1. The integration strategy must be in place before the acquisition is finalized.

2. Review each of the business unit for potential cost cutting/synergies orpotential asset disposals.3. Consider the effect on the workforce and determine how many, if any

redundancies are likely to happen, then what will be the cost & how tohandle that.

4. Risk diversification may well lower the cost of capital & therefore, increase

the value of entity.5. The entities cost of capital should be re-evaluated.6. Make positive effort to communicate the post-acquisition effect on staff

morals.7. There may be economies of scale to identify and evaluated.8. Undertake a review of assets, or resource audit, and consider selling non-

core elements or redundant assets.9. There may well be a need to pursue a more aggressive marketing strategy.10.The risk of the acquisition needs to be evaluated.11.There needs to be harmonization of corporate objective.12.There needs to be some strategy to manage different culture in old

entities.


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PRACTICAL QUESTION

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Q 1:


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Q 2:


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Q 3:


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Q 4:


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Q 5:


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Q 6:


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Q 7:


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Q 8:


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M&A :AS A GROWTHSTRATEGY

STRATEGYMODELS/THEORIES

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AnsoffsMatrix

Penetration

Market Development

Product Development

Diversification

BCG Matrix

Star

Question mark

Cash cows

Dogs

GrandStrategyMatrix

StrategyDevelopment

Product/Industry

LifeCycle

Quadrant I

Quadrant II

Quadrant III

Quadrant IV


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MarketPenetration

ProductDevelopment

MarketDevelopment

Diversification

AnsoffsMatrix

The Ansoff Growth matrix is a tool that helps businesses decide their productand market growth strategy.

Ansoffs product/market growth matrix suggests that a business attempts togrow depend on whether it markets new or existing products in new or

existing markets.


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How ???

1. New geographical markets - exporting the product to a new country2. New product dimensions or packaging3. New distribution channels

4. Different pricing policies to attract different customers or create newmarket segments

Business seeks tosell its existing

products into new

markets.

Introduce new products into existing markets. Thisstrategy may require the development of new

competencies and requires the business to developmodified products which can appeal to existing

markets.

Markets new products in new markets.This is an more risky strategy, as the business is movinginto markets, where it has little or no experience. For abusiness to adopt a diversification strategy, therefore, itmust have a clear idea about what it expects to gain

from the strategy and an honest assessment of the risks.


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The BCG matrix or also called BCG model relates to marketing. The BCG model is awell-known portfolio management tool used in product life cycle theory. BCG matrix isoften used to prioritize which products within company product mix get more funding andattention.

The BCG model is based on classification of products (and implicitly also company businessunits) into four categories based on combinations ofmarket growthand market share

relative to the largest competitor.


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Use of BCG matrix model ?

Each product has its product life cycle, and each stage in product's life-cycle represents adifferent profile of risk and return. Generally, a company should maintain a balancedportfolio of products. Having a balanced product portfolio includes both high-growthproducts as well as low-growthproducts.

Ahigh-growth product - a new one that we are trying to get to some market. It takessome effort and resources to market it, to build distribution channels, and to build salesinfrastructure, but it is a product that is expected to bring the gold in the future (iPod).

Alow-growth product - an established product known by the market. Characteristics ofthis product do not change much, customers know what they are getting, and the price

does not change much either. This product has only limited budget for marketing. The is themilking cow that brings in the constant flow of cash (Colgate toothpaste).

Q is >> how do we exactly find out what phase our product is in, and how do we classifywhat we sell? Furthermore, we also ask, where does each of our products fit into ourproduct mix? Should we promote one product more than the other one? The BCG matrixcan help with this. It also helps to decide what priorities to assign to not only products but

also company departments and business units.

BCG
http://www.maxi-pedia.com/product+life+cycle+plchttp://www.maxi-pedia.com/product+life+cycle+plc


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BCG STARS (highgrowth, high market

share)

- Stars are the leaders inthe business but still need

a lot of support forpromotion a placement.- If market share is kept,

Stars are likely to grow intocash cows.

BCG QUESTION MARKS (high growth, lowmarket share)

- Question marks are essentially new productswhere buyers have yet to discover them.

- The marketing strategy is to get markets to adopt

these products.- Question marks have high demands and low

returns due to low market share.- These products need to increase their market

share quickly or they become dogs.- The best way to handle Question marks is to

either invest heavily in them to gain market share

or to sell them.

BCG CASH COWS (low growth, high marketshare)

- If competitive advantage has been achieved, cashcows have high profit margins and generate a lot of

cash flow.- Because of the low growth, promotion and placement

investments are low.- Investments into supporting infrastructure canimprove efficiency and increase cash flow more.

- Cash cows are the products that businesses strive for.

BCG DOGS (lowgrowth, low market

share)

- Dogs should beavoided andminimized.

- Expensive turn-around plans usually

do not help.

BCG


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Quadrant I

- For those firms which are in a strong competitive position and flourishing with rapid

market growth, excellent strategic position; concentrate on current markets andproducts - concentration on current markets reveals the adoption of strategies such asmarket penetration and market development and concentration on current products callsfor adoption of product development strategy.

- If firms have excessive resources then adopt the expansion program and indulge inbackward, forward, or horizontal integration. The quadrant one firm also requiresidentifying the risk associated mainly if it is committed to a single product line To

minimize risk, go for diversification.

Quadrant II

- Firms having weak competitive position in fast growing market, Present marketposition must click in the minds of the management that they need to work An in-

depth analysis is necessary to identify the gray areas of incompetence and the reasonsbehind such ineffectiveness.

- If does not find any suitable strategy to adopt than divestiture of some divisions canbe considered as another option - Buy back the shares or to invest in the currentventure in other divisions to strengthen the competitive position. However as last resortto liquidation.

Grand Strategy Matrix


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Quadrant III

- The quadrant three firms are operating in a slow growth industry with a weak

competitive position. These firms are prone to further decline which may result possiblyin liquidation. To avoid - they needs to introduce drastic changes in almost all the areasof managing the company. The management has to change its philosophy and shouldnecessarily adopt new approaches of governing the firm. The management should bewilling to incur some extensive costs in the overall revamp of the organization.

- Strategically retrenchment (assets reduction) would be the best option to beconsidered first. Secondly diversifying the overall business through shifting the resources

should be evaluated as another choice (related or unrelated diversification). The finaloption is again divesture or liquidation.

Quadrant IV

- The firms in quadrant IV - are characterized as having a strong competitive positionbut are operating in a slow growth industry. These firms have to quest for the promisinggrowth areas and to exploit the opportunities in the growing markets as they possessthe strengths to instigate diversified programs in growing industries.

- Ideally, these firms have limited requirements of funds for internal growth, whereasthey enjoy the high cash flows due to the competitive position. TF, these firms can oftenhunt for related or unrelated diversification. Due to availability of excessive fundsquadrant IV firms can also pursue joint ventures.

Grand Strategy Matrix


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Product Life Cycle (PLC) is a term used to describe individual stages in the life of aproduct. PLC is an important aspect of conducting business which affects strategicplanning. PLC can be divided into several stages characterized by the revenue generatedby the product.

PLC is very similar to a life. A living being is first born (introduction), then it grows throughits youth (growth) to become an adult (maturity). When it gets old, it declines bothmentally and physically (decline), after which it eventually dies.

Analogy: Product developed >> Introduce it to the market >> Becomes known byconsumers, it grows >> Establishes a solid position in the market (mature) >> Overtaken

by superior competitors product is eventually withdrawn.


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PLC


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Introduction

- Product - one or few products, relativelyundifferentiated

- Price - Generally high, assuming a skim pricing

strategy for a high profit margin to recoup developmentcosts quickly. In some cases a penetration pricingstrategy is used and introductory prices are set low togain market share rapidly (Reliance mobile).

- Distribution- Distribution is selective and scattered asthe firm commences implementation of the distributionplan.

- Promotion - Promotion is aimed at building brand

awareness. Samples or trial incentives may be directedtoward early adopters. Also intended to convincepotential resellers to carry the product.

Growth

- Product - New product features andpackaging options; improvement ofproduct quality.

- Price - Maintained at a high level ifdemand is high, or reduced to captureadditional customers.

- Distribution - Distribution becomesmore intensive. Trade discounts areminimal if resellers show a strong interestin the product.

- Promotion - Increased advertising tobuild brand preference.

Maturity

- Product - Modifications are made and features areadded in order to differentiate the product from

competing products that may have been introduced.- Price - Possible price reductions in response tocompetition while avoiding a price war.

- Distribution - New distribution channels andincentives to resellers in order to avoid losing shelfspace.

- Promotion- Emphasis on differentiation and building

of brand loyalty. Incentives to get competitors'customers to switch.

Decline

- Product- The number of products in the productline may be reduced. Rejuvenate survivingproducts to make them look new again.

- Price - Prices may be lowered to liquidate

inventory of discontinued products. Prices may bemaintained for continued products serving a nichemarket.

- Distribution - Distribution becomes moreselective. Channels that no longer are profitableare phased out.

- Promotion- Expenditures are lower and aimed at

reinforcing the brand image for continuedproducts.

PLC


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CORPORATE

RESTRUCTURING


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What is Corporate Restructuring ?

Any substantial change in a companys financial

structure, or ownership or control, or business portfolio.

Designed to increase the value of the firm.

Restructuring

Improvecapitalization

Improve debtcomposition

Changeownershipand control


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Its All About Value

How can corporate and financial restructuring

create value ???

Liabilities

Equity

Debt

Assets

Fixed Assets& Investment

OperatingCash flows

Fix thebusiness

Fix thefinancing

o The proportion of Equity & Debt : Achieve lowest WACCo The kind of Equity & Debt : Short term? Long term? Convertibles?


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Restructuring

What to do ? Action points

Figure out what the business is worthnow

Use valuation model present value offree cash flows

Fix the business mix divestitures Value assets to be sold

Fix the business strategic partner ormerger

Value the merged firm withsynergies

Fix the financing improve D/Estructure

Revalue firm under different leverageassumptions lowest WACC

Fix the kind of equity What can be done to make the equitymore valuable to investors?

Fix the kind of debt or hybrid financing What mix of debt is best suited to

this business?Fix management or control Value the changes new control

would produce


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Type of restructuring

1. Divestitures: Dispose or sale of part of the assets or business unit

2. Spin-offs: All or substantial assets, liabilities, loans & business (on goingconcern basis) of one of the business division or undertaking to anothercompany, in share exchange.

3. Split-up: All or substantial A & L (on going concern basis) to more thanone company, in share exchange. Transferor co. cease to exist.

4. Downsizing: Cut down operation, people, production.

5. Outsourcing: Outsource non-critical operation to achieve focus on corefunction & operation.

6. Carve-Out: Its a hybrid of divestiture & Spin-offs. Transfer all A & L to100% subsidiary.

7. Joint Venture8. Buy-back of Shares & Securities9. LBOs &MBOs:


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LBOs & MBOs

Both are known asGoing Private

Management Buyouts:

i. Management teams purchase of the bulk of the firms shares.ii. Create a win-win situation for shareholders who receive a premium for

their stock and management who retain control.iii. To avoid lawsuits, the price paid must represent a higher premium to the

current market price.iv. Cash proceeds of the sale could fund other defenses such as share

buybacks.

Leveraged Buyouts:

i. Borrowed funds are used to pay for all or most of the purchase price.ii. Can be of an entire company or divisions of a company.iii. The tangible assets of the company are used as collateral for the loans.iv. Investors in LBOs are referred to as financial buyers because they are

primarily focused on relatively short-to intermediate-term financial returns


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LBOs & MBOs

Important differences:

i. MBO leads to private companies while LBO leaves the company publiclytraded with shareholders receiving stub equity in addition to cashpayout.

ii. Under the MBO, the company saves on public reporting costs, but itsequity shares remain illiquid securities. LBO preserves equity liquidity but

exploits no (or few) savings on reporting.

iii. Under the MBO, owners are insiders. In LBO, equity investors remainoutsiders.

iv. Under MBO, control of the firm changes. In LBO, control may not

necessarily change since the stub equity remains in the hands of publicshareholders.

v. The MBO creates strong conflict of interests, requiring the board toactively represent shareholders in the buyout negotiations. In LBO,ordinary business judgment rules applies.


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LEGAL ASPECTSOF

MERGER, ACQUISITION ANDCORPORATE RESTRUCTURING


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Which are applicable Laws ???

I. Companies Act, 1956

II. SEBI (Buy back of securities) Regulations, 1998

III. SEBI (Substantial acquisition of shares & takeover)

Regulations, 1997

IV. Clauses 40A & 40B of the listing agreements of BSE& NSE

V. SEBI (Delisting of securities) Guidelines, 2003


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C i A t 1956


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Companies Act, 1956

Approval from Creditors and Members is to be obtained, by holding ameeting with them [u/s 391(1) HC may order for meeting]

In practice, holding ofcreditors meeting can be dispensed off by making anapplication with HC, which would generally based on reputation and goodstanding of company, track record of past or pending litigation

All creditors or Creditors above certain value are given individual notice

u/s 391(2): If meeting happens then, resolution approving amalgamation or

demerger has to be passed, by simple majority in nos.# and majority ofvalue of creditors/members present and voting in person or by proxy

Condition precedent to approval from HC

No order can be passed, unless official liquidator scrutinizes the books of

accounts of transferor and submits a report to HC, stating that affairs ofcompany are not against members or public interest u/s 394(1)

Report of the official liquidator

HC needs to serve notice to Central Govt. for application u/s 391 or 394 forrepresentation, if any, by Central Government

Notice to Central Government - u/s 394A

C i A t 1956 k f i i


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Companies Act, 1956 Buy-Back of Securities

Buy-back must be authorized by the AOA of company u/s77A[2(a)]

By Board resolution Maximum is 10% of paid-up equity capital andfree reserves - u/s 77A[2(b)]

By Special resolution in AGM Maximum of25% of paid-up sharecapital and free reserves - u/s 77A[2(c)]

Condition for Buy-Back u/s 77A

Free reserves

Securities premium accounts

Proceeds of any shares or other securities, except from proceed ofsame kind of securities, i.e. buy-back of equity shares can be madeusing proceeds of preference share issue

Sources of buy-back

Illustration

SEBI (B b k f iti ) R l ti 1998


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SEBI (Buy back of securities) Regulations, 1998

(A) Buy-back only by way of -

From existing SH on proportionate basis through tender process From open market: (a) Book building process (b) Stock exchange

(Company cannot buy-back shares through negotiated deals)

(B) Company cannot buy-back its share in such a manner, that it would berequired delist regulation 3(2)

at-least 25% of each class of security issued by a company is required toget listed on any stock exchange [With prior approval limit can be loweror 10%, as the case may be

(C) Consideration for buy-back to be paid in cash only

(D) Cannot withdraw offer, once draft filed with SEBI & public announcement

(E) No bonus share can be issued till the closure of the offer

(F) Promoter or their associate cannot deal in the share in the stockexchange till the offer is open

(G) No announcement of buy-backcan be made during the pendency of anyscheme ofamalgamation or arrangement or compromise

(H) A company needs to appoint a compliance office for buy-back of shares

(I) Details of share brought back or destroyed have to be given to concernedstock exchange, within 7 days

(J) Company cannot buy-back locked-in securities during the lock-in period

(K) Within 2 days, needs to give details to public under regulation 19(7)

Condition of Buy-Back and General obligation of the Co.

Cl 40A & 40B f th li ti t f BSE & NSE


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Clauses 40A & 40B of the listing agreements of BSE & NSE

All listed company, needs to ensure minimum level of public SH @ 25%of total nos. of issued shares of a class or kind for the purpose ofcontinuous listing [sub-clause (i)], except companies -

At the time of initial listing, had offered to public less than 25%, butnot less than 10% of total nos. of issued share of class [sub-clause(ii)]

Companied which reached or would reach in future, irrespective of

their % holding at the time of initial listing a size of 2 Cr in nos. and`1000 Cr or more in terms of market capitalization [sub-clause(iii)]

Public holding: Share outstanding other than promoters & promotergroup and share held in custodian against overseas depository receipts

If fails to comply then, liable to delist in terms of SEBI delistingguidelines [sub-clause(ix)]

Clause 40A

In case of takeover offer or due to change in management, the personwho secures control of management, needs to comply with relevantprovision of SEBI (substantial acquisition of shares & t/o) regulation,1977 {Assignment - 4}

Clause 40B

SEBI (Deli ting of e itie ) G ideline 2003


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SEBI (Delisting of securities) Guidelines, 2003

Delisting can be either compulsory or voluntary

If delisting is from few stock exchange, while retaining listing at NSE - then,there is no need for giving exit opportunity.

However, if delisting is from NSE or all stock exchange, except one then, SHmust be given exit opportunity by reverse book building process

Points to be noted

Precondition: (A) Prior approval from SH by way of special resolution; (B)Public announcement; (C) Make application to concerned Stock exchange &comply with all relevant condition

Exit Price: Should be through reverse book building process.

Offer must have a floor price Based on average of 26 weeks quoted price,where shares are traded most frequently.

Refusal by promoter to accept the final offer: If they do this they cannotdelist

Right of SH in case of compulsory delisting: Promoters are obliged tocompensate @ FMV to SH, if they continue to hold securities in the delistedcompany and not sell them to promoters.

Procedure for voluntary delisting

After a Cooling period of 2 yrs

Reinstatement of delisted securities - clause 18.1


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ACCOUNTING &TAXATIONASPECTS

OF

MERGER, ACQUISITION ANDCORPORATE RESTRUCTURING

AS 14 T f l i


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AS 14: Type of amalgamation

AS 14

By way ofMerger

By way ofpurchase

(a) All assets & liabilities are transferred(b)90% SH of transferor company become the SH

in transferee company(c) Consideration for amalgamation is received

wholly in equity share of transferee company(cash may be paid for fraction portion)

(d) Business is intended to carried on as it is(e) No adjustment is intended to be made in the

book value of assets & liabilities, whenincorporated in final balance sheet

If any one or morecondition is not

satisfied


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A ti f D


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Accounting for Demerger

1. The ICAI has not prescribed any accounting treatment for demerger

2. However, transfer of assets may result into capital gain tax liability andhence, special exemption is given in income tax act, u/s 2(47)

Condition for exemption are:1. All assets and liabilities must be transferred at book value only2. Any revaluation must be ignored

3. Liabilities & loans to be transferred asi. Specific liabilities & loans have to be transferred to the resulting

companyii. Common loans & borrowing have to be apportioned in the same

ration of common borrowing/loansiii. Expenses like deferred revenue expenditure, preliminary

expenses, discount on issue of shares, etc have to be reducedfrom both side of the B/S, i.e. asset transferred and assetretained.

Income Tax Act 1961


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Income Tax Act, 1961

In order to qualify as amalgamation, condition to satisfy are - (1) All the assets are transferred

(2) All the liabilities are transferred

(3) of SH should become SH in amalgamated company (all classes ofshares, i.e. equity and preference shares)

Both type of amalgamation as per AS14 qualifies for exemption

This section doesnt specify mode of payment to be made to SH it can beshare, cash or/and bond.

Amalgamation u/s 2(1B)

Both entities involved should be companies

Condition u/s 391 to 394 of Companies Act, 1956 are compiled with There must be transfer of undertaking to resulting company (slide onaccounting for demerger)

Demerger u/s 2(19AA)

Above transfer are not considered as capital asset transfer & hence, no capital

gain is chargeable

Capital gain tax exemption u/s 2 (47)

Implication on carry forward & set off of losses


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Implication on carry forward & set-off of lossesand unabsorbed Depreciation

u/s 72 of the Income Tax Act, the losses arising under the head profit andgains of business or professioncan be set-off against future profits, uptoEight assessment years Unabsorbed DepN can be carried forward indefinitely

Conditions are:1. Carry forward and set-off should be by same assessee

2. Amalgamating company has to be industrial undertaking, ship or a hotel ora banking company manufacturing or processing of goods & computer software generation or distribution of electricity mining, etc

3. The amalgamating company has been engaged in the business in whichsuch loss or unabsorbed DepN has occurred at least for THREE years

4. Continue in the same business for FIVE years from date of amalgamation

Reverse Mergers

i. Holding company merges with subsidiary or investee companyii. Profit-making company is merged with the loss making company


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m&a & corp restructuring

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