mergers , acquistion by ankush vinod singh

ANKUSH SINGH – 9702313357 (BOMBAY)

[email protected] , [email protected]

Merger And Acquisition

Reorganization

Closure

Insolvency

Merger & Acquisition,

Downsizing Externalization

Delocalization.



Q1-What is Restrucrting? and what are the objective of Restrucrting?

Or

Objective of mergers and acquisition (page 7,11,12)

Or

Q2.What are the triggers /rationale of restricting ?Explain each in details?

Or

Q3.What is the objective of Acquisition?and what are its objectives?Quote a case how

the objective is achived?

Sol1- Restructuring may include company reorganization, closure, insolvency, merger &

acquisition, downsizing, externalization and delocalization.

Restructuring is driven by several factors including a more open global economy, downturns

in economic growth, an ageing population, introduction of new technologies affecting ways

of working and the necessity to combat climate change and to reduce environmental impact.

Restructuring is the corporate management term for the act of reorganizing the legal,

ownership, operational, or other structures of a company for the purpose of making it more

profitable, or better organized for its present needs.

Alternate reasons for restructuring include a change of ownership or ownership structure,

demerger, or a response to a crisis or major change in the business such as bankruptcy,

repositioning, or buyout. Restructuring may also be described as corporate restructuring, debt

restructuring and financial restructuring ,Portfolio Restructring ,financial restricting

,organizational restricting.

Objective Of Restrucrting

A- EXPANSION

1) Growth-

2) Technology

3) Product Advantage and product differentiation

4) Govt Policy

5) Exchange rates

6) Political economic stability

7) Diffrential labour costs

8) Diversification

9) Economies of scale

B-CORPORATE CONTROL

1) Improving Levereging Ratios

2) Utilization of surplus cash

3) Enhancement of voting power

4) Preventing undervaluation

http://en.wikipedia.org/wiki/Corporate_management

http://en.wikipedia.org/wiki/Company_%28law%29

http://en.wikipedia.org/wiki/Demerger

http://en.wikipedia.org/wiki/Bankruptcy

http://en.wikipedia.org/wiki/Positioning_%28marketing%29#Repositioning_a_company

http://en.wikipedia.org/wiki/Leveraged_buyout

http://en.wikipedia.org/wiki/Debt_restructuring





5) Anti takeover defence

C-CONTRACTION

1) Improving Performance

2) Booming Independence

3) Effort of unlearn

4) Strategic Adjustment

5) Increasing Value

D-CHANGE IN OWNERSHIP

1) Manoeuvring Leverage

2) Alteration in the control structure

3) Providing fairness to minority shareholders

E- Geographical Diversification- Tata motor acquires Daewoo of Korea in 2003.Infosys

buys Expert information limited of Australia.

Market share

Resorce transfer

Rationales for Making Acquisitions

Market Power

Gain size to exploit core competencies.

Usually a horizontal acquisition but may involve vertical or related acquisitions

(Disney – Fox Family Worldwide).

Time-Warner merger, financial and banking industry consolidation

Overcome Entry Barriers

Overcome barriers by acquiring firm in the industry.

Whirlpool‘s acquisition of Phillips Electronics appliance business

Cost and speed of new product development and introduction

Acquisitions can provide access to new products much more quickly and at a lower

cost than internal development of new products.

Many firms in the pharmaceutical industry use acquisitions to enter markets quickly,

to overcome the high costs of developing products internally, and to increase the

predictability of returns on their investments.



EXAMPLES

1) Tata-corus 3) Vodafone essar

2) Arcelor mittal 4) Ranbaxy-daaichi

Case how the objective is achived through acquisition

MERGER OF HUL WITH TATA OIL MILLS COMPANY(TOMCO)(415)

The ` 400 crore , 75 years old war horse from the TATA stable suffered a loss of `6 crore

for the six months ended by September 1992 and was expected in the year end to be `25

crore.TOMCO manufactures products like soap ,detergent and animal feeds .HUL also deals

in similar product line.Both company had their registered office at Bombay. TOMCO was

very good buy for the HUL on two very important counts ie.complementry brands and

manufacturing locations. Hamam , tomcos bestseller with 15% market share, moti soap.in the

detergent market levers did not have a mid priced bar ,tomcos super 501 plugged the

vaccum.in addition to it TOMCO had hair oil brands (lever was not represented here at that

time at all) and mid priced shampoos (lever had only one premium brand)In addition hul hul

took the advantage of manufacturing locations Following the merger hul network of stockist

could very well double from the 3000 , it had at that moment

Strategy

- Poor strategy or

implementation

- Overdiversification

- Leverage

Performance

- Poor or declining performance

- Difference between desired and

actual performance

- Assets are undervalued

- Perceived threat of takeover



Q4-What is Bankruptcy and how does restructuring help to avoid it?

Sol4- Bankruptcy-A legal proceeding involving a person or business that is unable to repay

outstanding debts. The bankruptcy process begins with a petition filed by the debtor (most

common) or on behalf of creditors (less common). All of the debtor's assets are measured and

evaluated, whereupon the assets are used to repay a portion of outstanding debt. Upon the

successful completion of bankruptcy proceedings, the debtor is relieved of the debt

obligations incurred prior to filing for bankruptcy

Bankruptcy Explained

Bankruptcy offers an individual or business a chance to start fresh by forgiving debts that

simply can't be paid while offering creditors a chance to obtain some measure of repayment

based on what assets are available. In theory, the ability to file for bankruptcy can benefit an

overall economy by giving persons and businesses another chance and providing creditors

with a measure of debt repayment.

Bankruptcy filings in the United States can fall under one of several chapters of the

Why Mergers and Acquisitions take place?

The common objective of both the parties in a M&A transaction is to seek

synergy in operating economies by combining their resources and efforts.

Now we shall see the reasons for M&A from the perspective of both, the

buyer company as well as the seller company.

What is the buyer looking for in a M&A transaction?

An opportunity for achieving faster growth

Obtaining tax concessions

Eliminating competition

Achieving diversification with minimum cost

Improving corporate image and business value

Gaining access to management or technical talent

Why Companies go for sale or offer themselves for sale?

Declining earnings and profitability

To raise funds for more promising lines of business

Desire to maximize growth

Give itself the benefit of image of larger company

Lack of adequate management or technical skills



Bankruptcy Code, such as Chapter 7 (which involves liquidation of assets), Chapter 11

(company or individual "reorganizations") and Chapter 13 (debt repayment with lowered debt

covenants or payment plans). Bankruptcy filing specifications vary widely among different

countries, leading to higher and lower filing rates depending on how easily a person or

company can complete the process.

What Does Bankruptcy Risk Mean? The risk that a company will be unable to meet its debt obligations. Often referred to as

"default" or "insolvency risk".

Bankruptcy Risk This is a risk that both equity- and bondholders take when deciding to invest in a company.

Aside from looking at overall profitability, analyzing a company's debt obligations and ability

to repay, agencies like Moody's and Standard & Poor's attempt to determine this risk by

giving bond ratings.

What Does Chapter 11 Mean? Named after the U.S. bankruptcy code 11, Chapter 11 is a form of bankruptcy that involves a

reorganization of a debtor's business affairs and assets. It is generally filed by corporations

which require time to restructure their debts.

Chapter 11 gives the debtor a fresh start, subject to the debtor's fulfillment of its obligations

under its plan of reorganization.

A Chapter 11 reorganization is the most complex of all bankruptcy cases and generally the

most expensive. It should be considered only after careful analysis and exploration of all

other alternatives.

Q5-List and explain classification of Mergers?

Sol5- Horizontal merger - Two companies that are in direct competition and share

similar product lines and markets.

Examples of Horizontal Mergers

1) The formation of Brook Bond Lipton India Ltd. through the merger of Lipton

India and Brook Bond

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

Corporation of India) Bank

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

Supply Company

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

Damodar Cement

Vertical merger - A customer and company or a supplier and company. Think of a

cone supplier merging with an ice cream maker.

Example of Vertical Merger

Vertical mergers can best be understood from examining real world deals. One such

http://www.economywatch.com/mergers-acquisitions/type/horizontal.html



merger occurred between Time Warner Incorporated, a major cable operation, and the

Turner Corporation, which produces CNN, TBS, and other programming. In this

merger, the Federal Trade Commission (FTC) was alarmed by the fact that such a

merger would allow Time Warner to monopolize much of the programming on

television. Ultimately, the FTC voted to allow the merger but stipulated that the

merger could not act in the interests of anti-competitiveness to the point at which the

public good was harmed.

Market-extension merger - Two companies that sell the same products in different

markets.

EXAMPLES

1) Eagle Bancshares Inc by the RBC Centura-

A very good example of market extension merger is the acquisition of Eagle

Bancshares Inc by the RBC Centura. Eagle Bancshares is headquartered at Atlanta,

Georgia and has 283 workers. It has almost 90,000 accounts and looks after assets

worth US $1.1 billion.

Eagle Bancshares also holds the Tucker Federal Bank

which is one of the ten biggest banks in the metropolitan Atlanta region as far as

deposit market share is concerned. One of the major benefits of this acquisition is that

this acquisition enables the RBC to go ahead with its growth operations in the North

American market.

2)Takeover of Raasi Cements by India Cements (page 403)

Product-extension merger - Two companies selling different but related products in

the same market.

EXAMPLES

The acquisition of Mobilink Telecom Inc. by Broadcom is a proper example of product

extension merger. Broadcom deals in the manufacturing Bluetooth personal area network

hardware systems and chips for IEEE 802.11b wireless LAN. Mobilink Telecom Inc. deals in

the manufacturing of product designs meant for handsets that are equipped with the Global

System for Mobile Communications technology. It is also in the process of being certified to

produce wireless networking chips that have high speed and General Packet Radio Service

technology. It is expected that the products of Mobilink Telecom Inc. would be

complementing the wireless products of Broadcom.

Conglomeration - Two companies that have no common business areas.

http://www.economywatch.com/mergers-acquisitions/type/extension-merger-product-extension.html





These mergers involve firms engaged in unrelated type of business activities i.e. the

business of two companies are not related to each other horizontally ( in the sense of

producing the same or competing products), nor vertically( in the sense of standing

towards each other n the relationship of buyer and supplier or potential buyer and

supplier). In a pure conglomerate, there are no important common factors between the

companies in production, marketing, research and development and technology. In

practice, however, there is some degree of overlap in one or more of this common

factors.

Conglomerate mergers are unification of different kinds of businesses under one

flagship company. The purpose of merger remains utilization of financial resources

2) L&T and Voltas Ltd are examples of such mergers.

3) Mahindra and mahindra and indian aluminuim limited

Q6- How can one measure the success or failure of merger? Explain with the help of

example?

Sol6-Success can also be measured when the following objectives of the merged entity is

achived (page 81)

1) Economies of Scale (Tata corus deal )

2) Increased revenue nad increased market share (dabur s balsara group acquisition)

3) Synergy

4) Taxes saving advantage

5) Geographical or other diversification (tata motor acquires Daewoo korea , Infosys

acquired export information service limited , austarlia)

6) Resource transfer (reliance acquires flag telecom of UK,)

7) Vertical intregation (Hindalco acquires 2 copper mines in australia ,ONGC acquires

Sakhalin oil in Russia)

8) Increased mkt share to increseased market power

Example of successful mergers

AIR INDIA AND INDIAN AIRLINES

HP AND COMPAQ

Failure can also be measured when the following objectives of the merged entity is

achived (89)

Statistics shows that half of the mergers are not successful

Though the M&As basically aim at enhancing the shareholders value or wealth, the results of

several empirical studies reveal that M&As consistently benefit the target company's

shareholders but not the acquirer company shareholders. A majority of corporate mergers fail.



Failure occurs on average, in every sense, acquiring firm stock prices likely to reduce when

mergers are announced; many acquired companies sold off; and profitability of the acquired

company is lower after the merger relative to comparable non-merged firms

1. Excessive premium

In a competitive bidding situation, a company may tend to pay more. Often highest bidder is

one who overestimates value out of ignorance.

2. Size Issues

A mismatch in the size between acquirer and target has been found to lead to poor acquisition

performance.

3. Lack of research

Acquisition requires gathering a lot of data and information and analyzing it. It requires

extensive research. A carelessly carried out research about the acquisition causes the

destruction of acquirer's wealth.

4. Diversification

Very few firms have the ability to successfully manage the diversified businesses. Unrelated

diversification has been associated with lower financial performance

5. Previous Acquisition Experience

While previous acquisition experience is not necessarily a requirement for future acquisition

success, many unsuccessful acquirers usually have little previous acquisition experience.

successful acquisitions.

6. Unwieldy and Inefficient

Conglomerate mergers proliferated in 1960s and 1970. Many conglomerates proved unwieldy

and inefficient and were wound up in 1980s and 1990s. The unmanageable conglomerates

contributed to the rise of various types of divestitures in the 1980s and 1990s.

11. Faulty evaluation

At times acquirers do not carry out the detailed diligence of the target company. They make a

wrong assessment of the benefits from the acquisition and land up paying a higher price.

12. Poorly Managed Integration

Integration of the companies requires a high quality management. Integration is very often

poorly managed with little planning and design. As a result implementation fails. The key

variable for success is managing the company better after the acquisition than it was managed

before. Even good deals fail if they are poorly managed after the merger.



13. Failure to Take Immediate Control

Control of the new unit should be taken immediately after signing of the agreement. ITC did

so when they took over the BILT unit even though the consideration was to be paid in 5

yearly installments.

14. Failure to Set the Pace for Integration

The important task in the merger is to integrate the target with acquiring company in every

respect. All function such as marketing, commercial; finance, production, design and

personnel should be put in place. In addition to the prominent persons of acquiring company

the key persons from the acquired company should be retained and given sufficient

prominence opportunities in the combined organization.

15. Incomplete and Inadequate Due Diligence

Lack of due diligence is lack of detailed analysis of all important features like finance,

management, capability, physical assets as well as intangible assets results in failure. ISPAT

Steel is a corporate acquirer that conducts M&A activities after elaborate due diligence.

16. Ego Clash

17. Merger between Equals

Merger between two equals may not work. The Dunlop Pirelli merger in 1964, which created

the world's second largest tier company, ended in an expensive divorce. Manufacturing plants

can be integrated easily, human beings cannot. Merger of equals may also create ego clash.

18. Over Leverage

Cash acquisitions results in the acquirer assuming too much debt. Future interest cost

consumes too great a portion of the acquired company's earnings (Business India 2005).

20. Limited Focus

If merging companies have entirely different products, markets systems and cultures, the

merger is doomed to failure. Added to that as core competencies are weakened and the focus

gets blurred the fallout on bourses can be dangerous. Purely financially motivated mergers

such as tax driven mergers on the advice of accountant can be hit by adverse business

consequences. The Tatas for example, sold their soaps business to Hindustan Lever.

21. Failure to Get Figures Audited

It would be serious mistake if the takeovers were concluded without a proper audit of

financial affairs of the target company.

22. Failure to Get an Objective Evaluation of the Target Company' Condition

Risk of failure will be minimized if there is a detailed evaluation of the target company's

business conditions carried out by the professionals in the line of business.



23. Failure of Top Management to Follow-Up

After signing the M&A agreement the top management should not sit back and let things

happen. First 100 days after the takeover determine the speed with which the process of

tackling the problems can be achieved. Top management follow-up is essential to go with a

clear road map of actions to be taken and set the pace for implementing once the control is

assumed.

24. Mergers between Lame Ducks

Merger between two weak companies does not succeed either. The example is the Stud

backer- Packard merger of 1955 when two ailing carmakers joined hands. By 1964 both

companies were closed down.

25. Lack of Proper Communication

Lack of proper communication after the announcement of M&As will create lot of

uncertainties.

26. Failure of Leadership Role

Some of the role leadership should take seriously are modeling, quantifying strategic benefits

and building a case for M&A activity and articulating and establishing high standard for

value creation. Walking the talk also becomes very important during M&As.

27. Inadequate Attention to People Issues

Not giving sufficient attention to people issues during due diligence process may prove costly

later on.

28. Strategic Alliance as an Alternative Strategy

Another feature of 1990s is the growth in strategic alliances as a cheaper, less risky route to a

strategic goal than takeovers.

30. Loss of Identity

Merger should not result in loss of identity, which is a major strength for the acquiring

company. Jaguar's car image dropped drastically after its merger with British Leyland.

31. Diverging from Core Activity

In some cases it reduces buyer's efficiency by diverting it from its core activity and too much

time is spent on new activity neglecting the core activity.

32. Expecting Results too quickly

Immediate results can never be expected except those recorded in red ink. Whirlpool ran up a

loss $100 million in its Philips white goods purchase. R.P.Goenk's takeovers of Gramaphone



Company and Manu Chhabria's takeover of Gordon Woodroffe and Dunlops fall under this

category.

Q7- What is the difference between M&A

Sol7-Although merger and acquisition are often used as synonymous terms, there is a subtle

difference between the two concepts.

1.In the case of a merger, two firms together form a new company. After the merger, the

separately owned companies become jointly owned and obtain a new single identity. When

two firms merge, stocks of both are surrendered and new stocks in the name of new company

are issued. Generally, mergers take place between two companies of more or less same size.

In these cases, the process is called Merger of Equals. merger happens when two

companies agree to operate together under the same ownership. Ideally, both companies

are of similar size. Both companies in this case surrender their shares and new shares

are issued.

2.However, with acquisition, one firm takes over another and establishes its power as the

single owner.Generally, the firm which takes over is the bigger and stronger one. The

relatively less powerful, smaller firm loses its existence, and the firm taking over, runs the

whole business with its own identity. Unlike the merger, stocks of the acquired firm are not

surrendered, but bought by the public prior to the acquisition, and continue to be traded in the

stock market. An acquisition happens when a company takes over a company and

establishes ownership over that company. Typically, the company which is acquired or

the target company ceases to exist as a separate entity. An example can be Corus which

ceased to exist when it was taken over by Tata Steel. Today the company operates as a

100% subsidiary of Tata Steel

3.Another difference is, when a deal is made between two companies in friendly terms, it is

typically proclaimed as a merger, regardless of whether it is a buy out. In an unfriendly deal,

where the stronger firm swallows the target firm, even when the target company is not willing

to be purchased, then the process is labeled as acquisition.

Merger through Absorption (ACQUISITION): An absorption is a combination of two or

more companies into an 'existing company'. All companies except one lose their identity in

such a merger. For example, absorption of Tata Fertilisers Ltd (TFL) by Tata Chemicals Ltd.

(TCL). TCL, an acquiring company (a buyer), survived after merger while TFL, an acquired

company (a seller), ceased to exist. TFL transferred its assets, liabilities and shares to TCL.

Merger through Consolidation(MERGER): A consolidation is a combination of two or

more companies into a 'new company'. In this form of merger, all companies are legally



dissolved and a new entity is created. Here, the acquired company transfers its assets,

liabilities and shares to the acquiring company for cash or exchange of shares. For example,

merger of Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian Software Company

Ltd and Reprographics Ltd into an entirely new company called HCL Ltd.

Q8-What is the difference between spin-off and sell off?

Sol8- SPIN OFF-

Spinoffs are a way to get rid of underperforming or non-core business

divisions that can drag down profits.

Process of spin off

1. The company decides to spin off a business division.

2.The parent company files the necessary paperwork with theSecurities

and Exchange Board of India(SEBI).

3.The spinoff becomes a company of its own and must also file

paperwork with the SEBI.

4.Shares in the new company are distributed to parent company

shareholders.

5.The spinoff company goes public.

Notice that the spinoff shares are distributed to the parent company

shareholders. There are two reasons why this creates value:

1. Parent company shareholders rarely want anything to do with the new spinoff. After all, it's

an goes public. underperforming division that was cut off to improve the bottom line. As

a result, many new shareholders sell immediately after the new company

2.Large institutions are often forbidden to hold shares in spinoffs due to the smaller market

capitalization, increased risk, or poor financials of the new company. Therefore, many large

institutions automatically sell their shares immediately after the new company goes public.

Simple supply and demand logic tells us that such large number of shares on the market will

naturally decrease the price, even if it is not fundamentally justified. It is this temporary

mispricing that gives the enterprising investor an opportunity for profit.

There is no money transaction in spin-off. The transaction is treated as stock dividend & tax

free exchange.

For examples-Kotak Mahindra capital finance ltd formed a subsidiary known as kotak

Mahindra capital corporation

SELL OFF–

Selling a part or all of the firm by any one of means: sale, liquidation, spin-off & so on. or

General term for divestiture of part/all of a firm by any one of a no. of means: sale,

liquidation, spin-off and so on.



PARTIAL SELL-OFF

A partial sell-off/slump sale, involves the sale of a business unit or

plant of one firm to another.

It is the mirror image of a purchase of a business unit or plant.

From the seller‘s perspective, it is a form of contraction; from the

buyer‘s point of view it is a form of expansion.

For example: When Coromandal Fertilizers Limited sold its cement division to India Cement

Limited, the size of Coromandal Fertilizers contracted whereas the size of India Cements

Limited expanded

Q9 What are the various options available to shake off a hostile takeover?Quote a case

of successful shakeoff?

Sol9- Combating Hostile Takeovers

The two terms - ‗mergers‘ and ‗acquisition‘ represent the ways by strategies used by

companies to buy, sell and recombine businesses. In the present day when there exists cut

throat competition in every sphere, not all mergers and acquisitions are consensual and

peaceful.

The concept of takeovers without consent have, therefore been ideally termed ―hostile

takeovers‖. no consented The history of hostile takeovers can be traced to 1980‘s, with the

US Supreme Court for the first time sat in judgment over the anti-takeover provisions of the

Illinois Business Take-Over Act and pronounced them as invalid in their landmark ruling in

There was a time some 2 decades back when hostile acquirers struck terror in the hearts of

corporate boards.. If wealthy dealmakers wanted to take over a company in a hostile

acquisition, bite it into pieces, and then spin those pieces off for a profit, there wasn‘t much

that the board of a company could do to stop the massacre. It was at that time that ‗poison

pills‘ and other anti takeover strategies were conceptualized. The anti=take over strategies

developed during that era quickly transformed the takeover law and fortified the pre-emptive

defenses of companies.

Meaning When an acquirer takes the control of a company by purchasing its shares without the

knowledge of the management it is termed as a hostile takeover. Thus, when an acquirer

silently and unilaterally, makes efforts to gain control of a company against the wishes of the

existing management, such act amounts to hostile takeover. Hostile takeover is an attempt by

outsider to wrest control away from an incumbent management.

Defenses against Hostile Takeovers-Shark Repellents There are several ways to defend against a hostile takeover. The most effective methods are

those where there exist built-in defensive measures that make a company difficult to take

over. These methods are collectively referred to as "shark repellents".

The classic „poison pill strategy‟ (the shareholders‟ rights plan) is the most popular

and effective defense to combat the hostile takeovers. Under this method the target



company gives existing shareholders the right to buy stock at a price lower than the

prevailing market price if a hostile acquirer purchases more than a predetermined amount

of the target company‘s stock.

The purpose of this move is to devalue the stock worth of the target company and dilute the

percentage of the target company equity owned by the hostile acquirer to an extent that

makes any further acquisition prohibitively expensive for him. „White Knight‟ is another

type of defense mechanism. In this case, a third company makes a friendly takeover

offer to the company facing a hostile takeover.(RIL BUYS 14.98% IN EIH HOTEL

GROUP TO HELP IT HOSTILE OPEN OFFER FROM ITC WHICH ALSO HOLD

SIMILAR PERCENTAGE OF SHARES IN EIH ) This is a common tactics in which the

target company finds another company to enter the scene and purchase them out and away

from the company making the hostile bid. The several reasons why the companies prefer to

be bought out by the third company could be -- better purchase terms, a better relationship or

better prospects for long-term success. At times these ‗white knight‘ companies only help the

target company improve the deal terms with the hostile bidder. A very good example is of

Severstal which acted as a ‗white knight‘ in the Arcelor-Mittal deal, and causing a 52.5 %

increase in the Mittal offer.

Some other types of defenses which are available to the targeted company are: Pac-Man Defense – wherein a target company thwarts a takeover bid by buying

stocks in the acquiring company, then taking the bidder company over.

Staggered Board:-It is used generally in combination with ‗Shareholder‘s Rights‘

plan and is considered most effective. This method drags out the takeover process by

preventing the entire board from being replaced at the same time. The directors are

grouped into classes, each group stands for the election at each annual general

meeting. It prevents entire board from being replaced at one go.

Golden Parachute is a tactics which works in the manner that it makes the

acquisition more expensive and less attractive. It is provision in a CEO's contract,

which is worded such that the CEO gets a large bonus in cash or stock if the company

is acquired.

Indian Legal and Regulatory Framework Any takeover in India needs to comply with the provisions of SEBI (Substantial Acquisition

of Shares and Takeover) Regulations, 1997 (―Takeover Code‖). It is important to understand

the various terms associated with the takeover and there meaning explained in the Takeover

Code.

The term ‗Target company‘ refers to is a listed company, whose shares or voting rights are

acquired/being acquired or whose control is taken over/being taken over by an acquirer either

directly or by acquiring control of its holding company or a company which is controlling it,

which is not a listed company.

As per regulation 2(1)(b), the term ―acquirer‖ means any person who, directly or indirectly,

acquires or agrees to acquire control over the target company, , either by himself or with any

person acting in concert with the acquirer. The term acquirer has been given a wide meaning

as the definition takes into account not only substantial acquisition of shares by a person, but

also takeover of control of the company.



As regards the term ―control‖, there is no exhaustive definition. It is dependent on the

circumstances of the case which determines who has control over the organization.

However the term control shall include: 1)The right to appoint majority of the directors or,

2) To control the management or policy decisions exercisable by a person or persons

acting individually or in concert directly or indirectly, including by virtue of their

shareholding or management rights or shareholders agreements or voting agreements or

in any other manner.

An explanation was inserted in the definition of the term ―control‖ vide SEBI (Takeovers)

Second Amendment, Regulations, 2002. The explanation provides that transfer from joint

control to sole control over a company is not to be considered as change in control if it has

been effected in accordance with regulation 2(1)(e), i.e., through inter se transfer of shares

among promoters.

The Takeover Code makes it difficult for the hostile acquirer to just sneak up on the target

company. It forewarns the company about the advances of an acquirer by mandating that the

acquirer make a public disclosure of his shareholding or voting rights to the company if he

acquires shares or voting rights beyond a certain specified limit. However, the Takeover

Code does not present any insurmountable barrier to a determined hostile acquirer.

The Takeover Code, vide Regulation 23, also imposes a prohibition on the certain actions of

a target company during the offer period, such as transferring of assets or entering into

material contracts and even prohibits the issue of any authorized but unissued securities

during the offer period. However, these actions may be taken with approval from the general

body of shareholders.

However, the regulation provides for certain exceptions such as the right of the company to

issue shares carrying voting rights upon conversion of debentures already issued or upon

exercise of option against warrants, according to pre-determined terms of conversion or

exercise of option. It also allows the target company to issue shares pursuant to public or

rights issue in respect of which the offer document has already been filed with the Registrar

of Companies or stock exchanges, as the case may be.

However this may be of little respite as the debentures or warrants, contemplated earlier must

be issued prior to the offer period. Further the law does not permit the Board of Director, of

the target company to make such issues without the shareholders approval either prior to the

offer period or during the offer period as it is specifically prohibited under Regulation 23.

During a takeover bid, it may be critical for the Board to quickly adopt a defensive strategy to

help ward of the hostile acquirer or bring him to a negotiated position. In such a situation, it

may be time consuming and difficult to obtain the shareholders‘ approvals especially where

the management and the ownership of the company are independent of each other.

The Takeover Code is required to be read with the SEBI (Disclosure & Investor Protection)

Guidelines 2000 (―DIP Guidelines‖), which are the nodal regulations for the methods and

terms of issue of shares/warrants by a listed Indian company. They impose several

restrictions on the preferential allotment of shares and/or the issuance of share warrants by a

listed company. Under the DIP guidelines, issuing shares at a discount and warrants which

convert to shares at a discount is not possible as the minimum issue price is determined with



reference to the market price of the shares on the date of issue or upon the date of exercise of

the option against the warrants. This creates an impediment in the effectiveness of the

shareholders‘ rights plan which involves the preferential issue of shares at a discount to

existing shareholders.

The DIP guidelines also provide that the right to buy warrants needs to be exercised within a

period of eighteen months, after which they would automatically lapse. Thus, the target

company would then have to revert to the shareholders after the period of eighteen months to

renew the shareholders‘ rights plan.

Without the ability to allow its shareholders to purchase discounted shares/ options against

warrants, an Indian company would not be able to dilute the stake of the hostile acquirer,

thereby rendering the shareholders‘ rights plan futile as a takeover deterrent.

Also, the FDI policy and the FEMA Regulations have provisions which restrict non-

residents from acquiring listed shares of a company directly from the open market in

any sector, including sectors falling under automatic route. There also exist certain

restrictions with respect to private acquisition of shares by non-residents, under automatic

route, is permitted only if Press Note 1 of 2005 read with Press Note 18 of 1998 is not

applicable to the non-resident acquirer. This has practically sealed any hostile takeover of any

Indian company by any non-resident.

However, for the poison pill strategy to work best in the Indian corporate scenario certain

amendments and changes to the prevalent legal and regulatory framework are required.

Importantly, a mechanism must be permitted under the Takeover Code and the DIP

Guidelines which permit the issue of shares/warrants at a discount to the prevailing market

price. These amendments would need to balance the interests of the shareholders while

allowing the target companies to fend off hostile acquirers.

Possibilities in India The DIP Guidelines do not stipulate any pricing restrictions on the issue of non-convertible

preference shares, non-convertible debentures, notes, bonds and certificates of deposit. Thus,

companies may consider structuring a poison pill in place whereby backend rights which

permit the shareholders to exchange the rights/shares held for senior securities with a

backend value as fixed by the Board, are issued to existing shareholders when the hostile

acquirer‘s shareholding crosses a predetermined threshold.

As most takeovers are carried out through borrowed funds, the use of backend rights reduces

the profitability of the takeover because of the mounting interest rates on borrowings; thus

deterring the hostile acquirer and more importantly sets the minimum takeover price, which is

the price at which the shares have been exchanged for senior securities.

Another method is where a company puts a provision in its Articles of Associations to the

effect that a hostile acquirer who succeeds in taking control of that company and/or its

subsidiaries is prohibited from using the company‘s established brand name. A live example

is of the Tata companies who have put in place a an arrangement with the Tata Sons

holding entity, whereby any hostile (or otherwise) acquirer of any of those entities is not

permitted to make use of the established “Tata” brand name.



As a consequence, the bidder might be able to take over the target Tata company but will be

shortchanged as it will not be entitled to a significant bite of its valuation — the valued brand

name!!

Hostility is usually perceived when an offer is made public that is aggressively rejected by

the target firm. Consequently, perceptions of hostility are closely linked with takeover

negotiations that are far from completion. Often firms engage in confidential negotiations

before there is a public announcement of a bid or an intention to bid. In some cases, the first

public announcement is of a successfully completed negotiation, which would be perceived

to be friendly, even if the early stage private negotiations would have seemed hostile if they

had been revealed to the public. In other cases, private negotiations break down and one of

the parties decides that public information about the potential bid would enhance its

bargaining position.

Example Of Hostile Take Over?

The most famous recent proxy fight was Hewlett-Packard‘s takeover of Compaq. The

deal was valued at $25 billion, but Hewlett-Packard reportedly spent huge sums on

advertising to sway shareholders. HP wasn‘t fighting Compaq — they were fighting a

group of investors that included founding members of the company who opposed the

merge. About 51 percent of shareholders voted in favor of the merger. Despite attempts to

halt the deal on legal grounds, it went as planned.

YAHOO MICROSOFT TAKEOVER

Conclusion Indian companies need to shift from desperate defensive play to getting ready on the

offensive. The reason for utilizing the poison pill defense is to protect shareholder value and

interest while stalling entities such as asset strippers that do not have the best interest of the

company in mind or add any value to it. However, companies need to ensure that this defense

is not misused by errant management. The need today, obviously, seems not to do away with

poison pills, but a change in the attitude and approach of the management towards the poison

pills. Not all hostile takeovers are bad; so long as the shareholders reserve the power to

exercise the poison pills and take an informed decision, the pills and hostile takeovers can do

more good than harm.

Q10-What is brand?Give five examples of intellectual of the company?

Sol10- “ A brand is name, term, sign, symbol, or design, or a combination of them,

intended to identify the goods or services of one seller or group of sellers and to

differentiate them from those of competition.”

Intellectual Capital



Relational capital: All relations a company entertains with external subjects, such as

suppliers, partners, clients (brands, ...), research centres, etc.;

Human capital: The sum total of the useful knowledge of your employees and your

customers with more emphasis on knowledge and competences residing with the

company's employees;

Organizational capital: Collective know-how, beyond the capabilities of individual

employees. E.g.: information systems; policies; intellectual property.

6

Intellectual Capital

Human Capital

Relational Capital

OrganisationalCapital

Intellectual Property

“Sociological” Skills and

Capital

“Technological” Skills and

Competencies

Infrastructure

Capital

6

Organisational (structural) capital: examples of IP

• patents

• copyrights

• design rights

• trade secrets

• trade marks

• service marks

• trade dress

• utility models

• plant & seed varieties

Why Value Intellectual Capital

1) Measurement of IC - enables a more efficient management of the company - i.e. to:

understand where value lies in the company

have a metric for assessing success and growth

http://en.wikipedia.org/wiki/Organizational_capital



provide a basis for raising finance or loans

2) If borrowing can only be secured against tangible assets, then knowledge-based

companies will be disadvantaged in investment and growth.

Q11 –What is brand value and why it is measured?

Sol1- Brand equity refers to the marketing effects or outcomes that accrue to a

product with its brand name compared with those that would accrue if the same

product did not have the brand name. And, at the root of these marketing effects is

consumers' knowledge. In other words, consumers' knowledge about a brand makes

manufacturers/advertisers respond differently or adopt appropriately adept measures

for the marketing of the brand. The study of brand equity is increasingly popular as

some marketing researchers have concluded that brands are one of the most valuable

assets that a company has.

Good examples of companies with strong brand equity are corporations such as Nike and

Coca-Cola, whose corporate logos are recognized worldwide.

Methods used for valuing brands

A number of authors and consulting firms have proposed different methods for brand

valuation. The different methods consider that a brand‘s value is:

1. The market value of the company‘s shares.

2. The difference between the market value and the book value of the company‘s

shares (market value added). Other firms quantify the brand‘s value as the difference

between the shares‘ market value and their adjusted book value or adjusted net worth

(this difference is called goodwill).

3. The difference between the market value and the book value of the company‘s

Company 2002

brand

value($

bn)

Brand

contribution to

market

capitalization of

parent company

(%)

2001

Brand

Value

($bn)

Coca-Cola 69.6 51 69.0

Microsoft 64.1 21 65.1

IBM 51.2 39 52.8

http://en.wikipedia.org/wiki/Marketing

http://fmcg-marketing.blogspot.com/2007/11/methods-used-for-valuing-brands.html



GE 41.3 14 42.4

Intel 30.9 22 34.7

Nokia 30.0 51 35.0

Disney 29.3 68 32.6

McDonald‘s 26.4 71 25.3

Marlboro 24.2 20 22.1

Mercedes-Benz 21.0 47 21.7

shares minus the management team‘s managerial expertise (intellectual capital).

4. The brand‟s replacement value

4.1. Present value of the historic investment in marketing and promotions.

4.2. Estimation of the advertising investment required to achieve the present level of

brand recognition.

5. The difference between the value of the branded company and that of another

similar company that sells unbranded products (generic products or private

labels). To quantify this difference, several authors and consulting firms propose

different methods:

5.1. Present value of the price premium (with respect to a private label) paid by

customers for that brand

5.2. Present value of the extra volume (with respect to a private label) due to the brand

5.3. The sum of the above two values

5.4. The above sum less all differential, brand-specific expenses and investments.

This is the most correct method, from a conceptual viewpoint. However, it is very

difficult to reliably define the differential parameters between the branded and

unbranded product, that is, the

differential price, volume, product costs, overhead expenses, investments, sales and



advertising activities, etc.

5.5. The difference between the [price/sales] ratios of the branded company and the

unbranded company multiplied by the company‘s sales. This method is used by

Damodaran to value the Kellogg‘s and Coca-Cola brands.

5.6. Differential earnings (between the branded company and the unbranded

company) multiplied by a multiple. As we shall see further on, this is the method used

by the consulting firm Interbrand.

6. The present value of the company‘s free cash flow minus the assets employed

multiplied by the required return. This is the method used by the firm Houlihan

Valuation Advisors.

7. The options of selling at a higher price and/or higher volume and the options of

growing through new distribution channels, new countries, new products, new

formats … due to the brand‘s existence

Q12-Explain the financial approach to the valuation?

Sol12- Financially driven approaches Cost-based approaches define the value of a brand as the aggregation of all historic costs

incurred or replacement costs required in bringing the brand to its current state: that is, the

sum of the development costs, marketing costs, advertising and other communication costs,

and so on.

These approaches fail because there is no direct correlation between the financial investment

made and the value added by a brand. Financial investment is an important component in

building brand value, provided it is effectively targeted. If it isn‘t, it may not make a bean of

difference. The investment needs to go beyond the obvious advertising and promotion and

include R&D, employee training, packaging and product design, retail design, and so on.

Comparables. Another approach is to arrive at a value for a brand on the basis of something

comparable.

But comparability is difficult in the case of brands as by definition they should be

differentiated and thus not comparable.

Furthermore, the value creation of brands in the same category can be very different, even if

most other aspects of the underlying business such as target groups, advertising spend, price

promotions and distribution channel are similar or identical.

Comparables can provide an interesting cross-check, however, even though they should never

be relied on solely for valuing brands.



Premium price. In the premium price method, the value is calculated as the net present value

of future price premiums that a branded product would command over an unbranded or

generic equivalent.

However, the primary purpose of many brands is not necessarily to obtain a price premium

but rather to secure the highest level of future demand.

The value generation of these brands lies in securing future volumes rather than securing a

premium price. This is true for many durable and non-durable consumer goods categories.

This method is flawed because there are rarely generic equivalents to which the premium

price of a branded product can be compared. Today, almost everything is branded, and in

some cases store brands can be as strong as producer brands charging the same or similar

prices. The price difference between a brand and competing products can be an indicator of

its strength, but it does not represent the only and most important value contribution a brand

makes to the underlying business.

Economic use. Approaches that are driven exclusively by brand equity measures or financial

measures lack either the financial or the marketing component to provide a complete and

robust assessment of the economic value of brands. The economic use approach, which was

developed in 1988, combines brand equity and financial measures, and has become the most

widely recognized and accepted methodology for brand valuation. It has been used in more

than 3,500 brand valuations worldwide. The economic use approach is based on fundamental

marketing and financial principles:

The marketing principle relates to the commercial function that brands perform within

businesses. First, brands help to generate customer demand. Customers can be individual

consumers as well as corporate consumers depending on the nature of the business and the

purchase situation. Customer demand translates into revenues through purchase volume, price

and frequency. Second, brands secure customer demand for the long term through repurchase

and loyalty.

The financial principle relates to the net present value of future expected earnings, a

concept widely used in business. The brand‘s future earnings are identified and then

discounted to a net present value using a discount rate that reflects the risk of those earnings

being realized.

To capture the complex value creation of a brand, take the following five steps:

1. Market segmentation. Brands influence customer choice, but the influence varies

depending on the market in which the brand operates.

Split the brand‘s markets into non-overlapping and homogeneous groups of consumers

according to applicable criteria such as product or service, distribution channels, consumption

patterns, purchase sophistication, geography, existing and new customers, and so on. The

brand is valued in each segment and the sum of the segment valuations constitutes the total

value of the brand.

2. Financial analysis. Identify and forecast revenues and earnings from intangibles generated

by the brand for each of the distinct segments determined in Step 1. Intangible earnings are



defined as brand revenue less operating costs, applicable taxes and a charge for the capital

employed. The concept is similar to the notion of economic profit.

3. Demand analysis. Assess the role that the brand plays in driving demand for products and

services in the markets in which it operates, and determine what proportion of intangible

earnings is attributable to the brand measured by an indicator referred to as the ―role of

branding index.‖ This is done by first identifying the various drivers of demand for the

branded business, then determining the degree to which each driver is directly influenced by

the brand. The role of branding index represents the percentage of intangible earnings that are

generated by the brand. Brand earnings are calculated by multiplying the role of branding

index by intangible earnings.

4. Competitive benchmarking. Determine the competitive strengths and weaknesses of the

brand to derive the specific brand discount rate that reflects the risk profile of its expected

future earnings (this is measured by an indicator referred to as the ―brand strength score‖).

This comprises extensive competitive benchmarking and a structured evaluation of the

brand‘s market, stability, leadership position, growth trend, support, geographic footprint and

legal protectability.

5. Brand value calculation. Brand value is the net present value (NPV) of the forecast brand

earnings, discounted by the brand discount rate. The NPV calculation comprises both the

forecast period and the period beyond, reflecting the ability of brands to continue generating

future earnings

Q13- NMERICAL PROBLEM

Q14-Explain the importance of due diligence with examples and illustration checklist

for PATENT , TRADEMARK AND COPYWRIGHT?

Sol14- Due dilligence is a process of gathering information,

assessing the merits, issues,

And risks associated with a business transactions

When is it necessary?

New ventures

Mergers

Acquisitions

Licenses

IPO

Importance of IP in Due Diligence

1. Polaroid vs. Kodak Case



2. Least priority is given to IP. DD Starts with Property and Fixed Assets

3. Who does not have IP assets?

a. Software Company

b. Bio technology

c. Manufacturer

d. Publisher (Newspaper/Television broadcasting channel)

The Importance Of Due Diligence In An Enterprise Restructuring Programme

1. The term, Due Diligence, is usually associated with contracts or investment decisions

and, in general, means that proper efforts will be made in investigations or

examinations of information provided in a given transaction. Specifically, the Due

Diligence report is a thorough examination of the enterprise in all its aspects.

2. The Financial Due Diligence can be compared to an Audit of the particular enterprise

to determine its financial situation including a very detailed listing of all its assets and

of liabilities by category such as operating expenses, loan debts and so on.

3. The Legal Due Diligence encompasses a review of the legislation establishing the

enterprise and the provisions for its governance, and any other laws affecting the

enterprise. It also includes a review of current contractual obligations both short-term

and long-term. Also included are pending cases involving the enterprise.

4. The Human Resources Due Diligence is a detailed examination of the employee

complement of the enterprise at all levels together with analysis of their terms of

reference, deployment, qualifications, and other relevant details. This exercise

culminates with an assessment of whether there is a need for right-sizing of the staff

complement. In most sectors there are indicative ratios of staff to key performance

criteria which are used to determine the adequacy or otherwise of staff qualifications

and numbers.

5. International and local consultants on behalf of the Privatisation Unit normally carry

out the Due Diligence study. In the case of Telecom Lesotho, Due Diligence studies

were carried out by PriceWaterhouseCoopers (Financial and HR), Clifford Chance

(Regulatory and Competition) and Edward Nathan & Friedland (Legal). These studies

were then incorporated into the Information Memorandum for potential investors.

6. If the Privatisation Scheme is approved by Cabinet, it is then advertised, and serious

bidders are allowed unrestricted access into the enterprise, and accorded the right to

scrutinise in detail all the operations and records of the enterprise. In other words, the

bidders conduct their own Due Diligence so that they may prepare realistic bids and

verify information provided by the Government in its Information Memorandum..



Checklist for Patent DD

1. Obtain a complete list of the company‘s Indian, U.S., international, foreign patents

and patent applications.

2. Obtain technical description of products, including formulations & manufacturing

processes.

3. Determine whether the procedures are followed and are appropriate and effective.

4. Obtain confirmation that the company has recorded assignments (where applicable)

for all U.S. and foreign patents and patent applications.

5. Whether the company has assigned or granted security interests.

6. Patent maintenance and annuity fee records.

7. Pending issues of infringement including correspondence to that effect.

8. Actual or threatened litigation/claims against the company, such as cease and desist

letters. Current status of litigation. Study copies of settlements.

9. Search for patents and patent applications in the names of key personnel, consultants,

and principal clinical trial investigators

Q15- What r the steps involved in the amalgamation of comp in India?

Sol15- The procedure for the amalgamation of two companies has to be viewed from the

Transferor and Transferee Company. Therefore, the procedure has been divided into two

parts i.e. procedure to followed by the transferor company and the transferee company

respectively.

Steps To Be Followed By Transferee Company

1. Memorandum Of Association (M/A)

The Memorandum of Association must provide the power to amalgamate in its objects

clause. It M/A is silent, amendment in M/A must take place.

2. Board Meeting A Board Meeting shall be convened to consider and pass the following requisite resolutions:

- approve the draft scheme of amalgamation;

- to authorise filing of application to the court for directions to convene a general meeting;

- to file a petition for confirmation of scheme by the High Court.

3. Application To The Court An application shall be made to the court for directions to convene a general meeting by way

of Judge's summons supported by an affidavit. The proposed scheme of amalgamation must

be attached to such affidavit.



The summons should be accompained by:

" A certified copy of the M&A of both companies

" A certified true copy of the latest audited B/S and P&L A/c of transferee company

4. Copy To Regional Director

A copy of application made to concerned H.C. shall also be sent to the R.D. of the region.

Although, such notice is supposed to be sent by the H.C., usually the company sends it

without waiting for the H.C. to send it.

5. Order Of High Court

On hearing of the summons, the H.C. shall pass the necessary orders which shall include:

" Time and place of the meeting

" Chairman of the meeting

" Fixing the quorum

" Procedure to be followed in the meeting for voting by the proxy

" Advertisement of notice of the meeting

" Time limit for the chairman to submit the report to the court regarding the result of the

meeting

6. Notice Of The Meeting

The notice of the meeting shall be sent to the creditors and/or the shareholders individually

by the chairman so appointed by registered post enclosing:

" A statement setting forth the following:

- Terms of amalgamation and its effects

- Any material interests of the director, MDs or Manager, in any capacity

- Effect of the arrangement on those interests.

" A copy of the proposed scheme of amalgamation

" A form of proxy

" Attendance slip

" Notice of the resolution for authorizing issue of shares to persons other than existing

shareholders

7. Advertisement Of Notice Of Meeting

The notice of the meeting shall be advertised in an English and Hindi N/P as the court may

direct.

8. Notice To Stock Exchange

In case of the listed company, 3 copies of the notice of the general meeting alongwith

enclosures shall be sent to the Stock Exchange where the company is listed.

9. Filing Of Affidavit For The Compliance

An affidavit not les than 7 days before the meeting shall be filed by the Chairman of the

meeting with the Court showing that the directions regarding the issue of notices and advt.

Have been duly complied with.



10. General Meeting

The General Meeting shall be held to pass the following resolutions:

" Approving the scheme of amalgamation by ¾th majority

" Special Resolution authorizing allotment of shares to persons other than existing

shareholders or an ordinary resolution be passed subject to getting Central Government's

approval for the allotment as per the provisions of Section 81(1A) of the Companies Act,

1956.

" The resolution to empower directors to dispose of the shares not taken up by the

dissenting shareholders at their discretion.

" An ordinary/special resolution shall be passed to increase the Authorised share capital, if

the proposed issue of shares exceeds the present authorised capital.

The decision of the meeting shall be ascertained only by taking a poll on resolutions.

11. Reporting Of Result Of The Meeting

The Chairman of the meeting shall report the result of the meeting to the court within the

time fixed by the judge or within 7 days, as the case may be. A copy of proceedings of the

meeting shall also be sent to the concerned Stock Exchange.

12. Formalities With Roc

The following documents shall be filed with ROC alongwith the requisite filing fees:

" Form No. 23 of Companies General Rules & Forms + copy of Special Resolution

" Resolution approving the scheme of amalgamation

" Special resolution passed for the issue of shares to persons other than existing

shareholders

13. Petition

For approval of the scheme of amalgamation, a petition shall be made to the H.C. within 7

days of the filing of report by the chairman.

Note:

" If the Regd. Offices of the companies are in same state - then both the companies may

move jointly to the High Court.

" If the Regd. Offices of the companies are in different states - then each company shall

move the petition in respective High Court for directions

14. Sanction Of The Scheme

The Court shall sanction the scheme on being satisfied that:

" The whole scheme is annexed to the notice for convening meeting. This provision is

mandatory in nature

" The scheme should have been approved by the company by means of ¾th majority of

the members present.

" The scheme should be genuine and bona fide and should not be against the interests of

the creditors, the company and the public interest.

After satisfying itself, the court shall pass orders in the requisite form



15. Stamp Duty

A scheme sanctioned by the court is an instrument liable to stamp duty.

16. Filing With Roc

The following documents shall be filed with ROC within 30 days of order:

" A certified true copy of Court's Order

" Form No. 21 of Companies General Rules & Forms

17. Copy Of Order To Be Annexed

A copy of court's order shall be annexed to every copy of the Memorandum of Association

issued after the certified copy of the order has been filed with as aforesaid.

18. Allotment Of Shares

A Board Resolution shall be passed for the allotment of shares to the shareholders in

exchange of shares held in the transferor-company and to fix the record date for this

purpose.

Steps To Be Followed By Transferor Company

The procedure as given above shall be followed by the transferor company.

The only exception is that - there is no need for the transferor company to pass a special

resolution for offering shares to the persons other than the existing shareholders and to file

Form No. 23 of the Companies General Rules and Forms with the Registrar of Companies.

Q16-Exchange ratio determination where the P/E ratio is to be maintained in case of

mergers of listed companies in india?

Sol------------Numerical Problem

Q17-What is demerger and how it is different from spin-off?

Sol17- Notes

Q18-What are the motives of buyout?List some forms of buyouts?

Sol18- Features of any „buy out‟ (BO)

Public-private transaction: involves offer for entire share capital of listed firm,

subsequent re-registration as a private company

Most involve significant increase in leverage

Shareholders are usually managers and private equity funds

LBO usually refers to a public-private transaction with increase in leverage

Some forms of „buy-outs‟

1. Management buyout (MBO): when incumbent management team takes over firm



2. Management buying (MBI): when outside management team acquires firm and takes

it private

3. Institutional buyout (IBO): new owners of delisted firm are solely institutional

investors or private equity firms

Version of above through difference procedure

1. Is MBO if management gained equity through being in bidding group

2. Is IBO if management gained equity as component of remuneration package. They

don‘t negotiate on behalf of bidding group.

3. Reverse LBO: secondary initial public offering (SIPO) for a previous LBO

Motives

Tax benefits

o Tax shield from debt

Managerial incentive realignment

Control hypothesis

o More concentrated ownership, so more incentives to monitor

Free cash flow

Wealth transfer (from bondholders to shareholders)

o Unexpected increase in risk of investment projects

o Dividend payments

o Unexpected issue of debt of higher or equal seniority

Q19-What is leveraged buyout?On what theorem it is based and what are its

advantages & weakness?

Sol19- A LBO is a company acquisition method by which a business can seek to takeover

another company or at least gain a controlling interest in that company. Special about

leveraged buy-outs is that the corporation that is buying the other business borrows a

significant amount of money to pay for (the majority of) the purchase price (usually over

70% or more of the total purchase price).

The debt which has been incurred is secured against the assets of the business being

purchased.

Interest payments on the loan will be paid from the future cash-flow of the acquired

company.

http://www.valuebasedmanagement.net/methods_freecashflow.html



A leveraged buyout (or LBO, or highly-leveraged transaction (HLT), or "bootstrap"

transaction) occurs when a financial sponsor acquires a controlling interest in a

company's equity and where a significant percentage of the purchase price is

financed through leverage (borrowing). The assets of the acquired company are

used as collateral for the borrowed capital, sometimes with assets of the acquiring

company. The bonds or other paper issued for leveraged buyouts are commonly

considered not to be investment grade because of the significant risks involved.

BASED ON Modigliani-Miller theorem

Advantages of LBO

1. Low capital or cash requirement for the acquiring entity

2. Synergy gains, by expanding operations outside own industry or business,

3. Efficiency gains by eliminating the value-destroying effects of excessive

diversification,

4. Improved Leadership and Management. Takeovers weed out or discipline rogue

managers.

5. Leveraging: as the debt ratio increases, the equity portion of the acquisition financing

shrinks to a level at which a private equity firm can acquire a company by putting up

anywhere from 20-40% of the total purchase price.

Weakness of LBO

1. Exploiting wealth of third party

2. Interest payments are tax deductible so Government looses on revenue

3. Risk of management and shareholder confrontation will impair the success of the

LBO.

4. Risk is effectively transferred to the Financer who has only interest compensation for

the risk; making the equation unfair.

5. Most of the LBOs were for asset stripping which is frowned upon by mature

corporate.

6. Structuring a LBO document for a financer is difficult in the Indian Legal

Environment.

http://en.wikipedia.org/wiki/Financial_sponsor

http://en.wikipedia.org/wiki/Controlling_interest

http://en.wikipedia.org/wiki/Ownership_equity

http://en.wikipedia.org/wiki/Leverage_%28finance%29

http://en.wikipedia.org/wiki/Debt

http://en.wikipedia.org/wiki/Investment_grade

http://en.wikipedia.org/wiki/Modigliani-Miller_theorem



Q20 Explain the importance of modi guilani miller theorem

The total return of an asset to its owners, all else being equal and within strict restrictive

assumptions, is unaffected by the structure of its financing. As the debt in an LBO has a

relatively fixed, albeit high, cost of capital, any returns in excess of this cost of capital flow

through to the equity.

mergers , acquistion by ankush vinod singh

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