Presentation On

Mergers and AcquisitionsDipjoy Das

2

Types of Business Combination• Merger or Amalgamation– Merger or amalgamation may take two forms:

• Absorption is a combination of two or more companies into an existing company.

• Consolidation is a combination of two or more companies into a new company.

– In merger, there is complete amalgamation of the assets and liabilities as well as shareholders’ interests and businesses of the merging companies. There is yet another mode of merger. Here one company may purchase another company without giving proportionate ownership to the shareholders’ of the acquired company or without continuing the business of the acquired company.

3

Types of Business Combination• Forms of Merger:– Horizontal merger it is a merger when two or more firms dealing in the

similar lines of activity combine together. – Vertical merger it is a merger that includes two or more stages of

production/distribution that are usually separate. – Conglomerate merger it is a merger in which the firms engaged of totally

different unrelated activities combine together.

Acquisition

• Acquisition may be defined as an act of acquiring effective control over assets or management of a company by another company without any combination of businesses or companies.

• A substantial acquisition occurs when an acquiring firm acquires substantial quantity of shares or voting rights of the target company.

5

Types of Business Combination• Takeover – The term takeover is understood to connote hostility.

When an acquisition is a ‘forced’ or ‘unwilling’ acquisition, it is called a takeover.

• Takeover can assume three forms— --friendly/negotiated --open market/hostile --bail out • Parties in the Acquisition - a) Holding company – it is a company that holds more than half of

the nominal value of the equity capital of another company, or controls the composition of its Board of Directors.

b) Subsidiary company- the company with the lesser number of share is called subsidiary company. Both the companies maintain separate forms of accounts.

6

Motives of Mergers and Acquisitions

• Mergers and Acquisition are intended to:– Limit competition.– Utilise under-utilised market power.– Overcome the problem of slow growth and profitability

in one’s own industry.– Achieve diversification.– Gain economies of scale and increase income with

proportionately less investment.– Establish a transnational bridgehead without excessive

start-up costs to gain access to a foreign market.

7

Motives and Benefits of Mergers and Acquisitions

– Utilise under-utilised resources–human and physical and managerial skills.

– Displace existing management.– Circumvent government regulations.– Reap speculative gains attendant upon new security issue

or change in P/E ratio.– Create an image of aggressiveness and strategic

opportunism, empire building and to amass vast economic powers of the company.

8

Benefits of Mergers and Acquisitions

• The most common advantages of M&A are:– Accelerated Growth– Enhanced Profitability

• Economies of scale -- it is prevalent among horizontal and vertical mergers. They result

in lower average cost of production and sales due to higher level of operations.

• Synergy— it results from complementary activities. Eg. One firm may have a

substantial amount of financial resource while the other may have a profitable investment opportunity.

– Diversification of Risk

9

Benefits of Mergers and Acquisitions– Reduction in Tax Liability– Financial Benefits• Financing constraint • Surplus cash • Debt capacity • Financing cost

– Increased Market Power

10

Analysis of Mergers and Acquisitions

• There are three important steps involved in the analysis of mergers or acquisitions:– Planning– Search and screening– Financial evaluation it is very important part of merger and acquisition it deals

with evaluating the financial aspects of the target firm. book value Appraisal value Market value Earning per share

11

Financing a Merger • Cash Offer:

– A cash offer is a straightforward means of financing a merger. It does not cause any dilution in the earnings per share and the ownership of the existing shareholders of the acquiring company.

• Share Exchange:– A share exchange offer will result into the sharing of ownership of

the acquiring company between its existing shareholders and new shareholders (that is, shareholders of the acquired company). The earnings and benefits would also be shared between these two groups of shareholders. The precise extent of net benefits that accrue to each group depends on the exchange ratio in terms of the market prices of the shares of the acquiring and the acquired companies.

– The bootstrapping phenomenon.

12

Merger Negotiations: Significance of P/E Ratio and EPS Analysis

• The mergers and acquisitions decisions are also evaluated in terms of EPS, P/E ratio, book value etc.

• Share Exchange Ratio• The share exchange ratio (SER) would be as follows:

• The exchange ratio in terms of the market value of shares will keep the position of the shareholders in value terms unchanged after the merger since their proportionate wealth would remain at the pre-merger level.

Share price of the acquired firmShare exchange ratio

Share price of the acquiring firmb

a

P

P

13

Regulation of Mergers and Takeovers in India

• In India, mergers and acquisitions are regulated through:– The provision of the Companies Act, 1956, – The Monopolies and Restrictive Trade Practice (MRTP)

Act, 1969, – The Foreign Exchange Regulation Act (FERA), 1973,– The Income Tax Act, 1961, and – The Securities and Controls (Regulations) Act, 1956.

• The Securities and Exchange Board of India (SEBI) has issued guidelines to regulate mergers, acquisitions and takeovers.

14

Regulation of Mergers and Takeovers in India

• Legal Measures against Takeovers• Refusal to Register the Transfer of Shares:

– a legal requirement relating to the transfer of shares have not be complied with; or

– the transfer is in contravention of the law; or– the transfer is prohibited by a court order; or– the transfer is not in the interests of the company and the public.

• Protection of Minority Shareholders’ Interests• SEBI Guidelines for Takeovers:

– Disclosure of share acquisition/holding – Public announcement and open offer

• Offer price • Disclosure• Offer document

15

Legal Procedures

• Permission for merger • Information to the stock exchange • Approval of board of directors • Application in the High Court • Shareholders’ and creditors’ meetings • Sanction by the High Court • Filing of the Court order• Transfer of assets and liabilities • Payment by cash or securities

16

Accounting for Mergers and Acquisitions

• Pooling of Interests Method In the pooling of interests method of accounting, the

balance sheet items and the profit and loss items of the merged firms are combined without recording the effects of merger. This implies that asset, liabilities and other items of the acquiring and the acquired firms are simply added at the book values without making any adjustments.

• Purchase Method Under the purchase method, the assets and liabilities

of the acquiring firm after the acquisition of the target firm may be stated at their exiting carrying amounts or at the amounts adjusted for the purchase price paid to the target company.

THANK YOU