Complete MBA

1.1 INTRODUCTION Wealth maximisation is the main objective of financial management and growth is essential for increasing the wealth of equity shareholders. The growth can be achieved through expanding its existing markets or entering in new markets. A company can expand/diversify its business internally or externally which can also be known as internal growth and external growth. Internal growth requires that the company increase its operating facilities 
i.e. marketing, human resources, manufacturing, research, IT etc. which requires huge amount of funds. Besides a huge amount of funds, internal growth also require time. 

Thus, lack of financial resources or time needed constrains a company’s space of growth. The company can avoid these two problems by acquiring production facilities as well as other resources from outside through mergers and acquisitions. 

1.2 MERGERS AND ACQUISITIONS Mergers and acquisitions are the most popular means of corporate restructuring or business combinations in comparison to amalgamation, takeovers, spin-offs, leverage buy-outs, buy-back of shares, capital reorganisation, sale of business units and assets etc. Corporate restructuring refers to the changes in ownership, business mix, assets mix and alliances with a motive to increase the value of shareholders. To achieve the objective of wealth maximisation, a company should continuously evaluate its portfolio of business, capital mix, ownership and assets arrangements to find out opportunities for increasing the wealth of shareholders. There is a great deal of confusion and disagreement regarding the precise meaning of terms relating to the business combinations, i.e. mergers, acquisition, take-over, amalgamation and consolidation. Although the economic considerations in terms of motives and effect of business combinations are similar but the legal procedures involved are different. 

The mergers/amalgamations of corporates constitute a subject-matter of the Companies Act and the acquisition/takeover fall under the purview of the Security and Exchange Board of India (SEBI) and the stock exchange listing agreements.
A merger/amalgamation refers to a combination of two or more companies into one company. One or more companies may merge with an existing company or they may merge to form a new company. Laws in India use the term amalgamation for merger for example, Section 2 (IA) of the Income Tax Act, 1961 defines amalgamation as the merger of one or more companies (called amalgamating company or companies) with another company (called amalgamated company) or the merger of two or more companies to form a new company in such a way that all assets and liabilities of the amalgamating company or companies become assets and liabilities of the amalgamated company and shareholders holding not less than nine-tenths in value of the shares in the amalgamating company or companies become shareholders of the amalgamated company. After this, the term merger and acquisition will be used interchangeably. Merger or amalgamation may take two forms: 
merger through absorption, merger through consolidation. Absorption is a combination of two or more companies into an existing company. All companies except one lose their identity in a merger through absorption. For example, absorption of Tata Fertilisers Ltd. (TFL) by Tata Chemical Limited (TCL). 

Consolidation is a combination of two or more companies into a new company. In this form of merger, all companies are legally dissolved and new company is created for example Hindustan Computers Ltd., Hindustan Instruments Limited, Indian Software Company Limited and Indian Reprographics Ltd. Lost their existence and create a new entity HCL Limited.

1.2.1 Types of Mergers Mergers may be classified into the following three types
- (i) horizontal,
 (ii) vertical and
 (iii) conglomerate. Horizontal Merger Horizontal merger takes place when two or more corporate firms dealing in similar lines of activities combine together. For example, merger of two publishers or two luggage manufacturing companies. Elimination or reduction in competition, putting an end to price cutting, economies of scale in production, research and development, marketing and management are the often cited motives underlying such mergers.

 Vertical Merger Vertical merger is a combination of two or more firms involved in different stages of production or distribution. For example, joining of a spinning company and weaving company. Vertical merger may be forward or backward merger. When a company combines with the supplier of material, it is called backward merger and when it combines with the customer, it is known as forward merger. The main advantages of such mergers are lower buying cost of materials, lower distribution costs, assured supplies and market, increasing or creating barriers to entry for competitors etc.
Conglomerate merger Conglomerate merger is a combination in which a firm in one industry combines with a firm from an unrelated industry. 
A typical example is merging of different businesses like manufacturing of cement products, fertilisers products, electronic products, insurance investment and advertising agencies. Voltas Ltd. is an example of a conglomerate company. Diversification of risk constitutes the rationale for such mergers.
1.2.2 Advantages of merger and acquisition The major advantages of merger/acquisitions are mentioned below: Economies of Scale: The operating cost advantage in terms of economies of scale is considered to be the primary objective of mergers. These economies arise because of more intensive utilisation of production capacities, distribution networks, engineering services, research and development facilities, data processing system etc. Economies of scale are the most prominent in the case of horizontal mergers. In vertical merger, the principal sources of benefits are improved coordination of activities, lower inventory levels. Synergy: It results from complementary activities. 

For examples, one firm may have financial resources while the other has profitable investment opportunities. In the same manner, one firm may have a strong research and development facilities. The merged concern in all these cases will be more effective than the individual firms combined value of merged firms is likely to be greater than the sum of the individual entities. Strategic benefits: If a company has decided to enter or expand in a particular industry through acquisition of a firm engaged in that industry, rather than dependence on internal expansion, may offer several strategic advantages:
(i) it can prevent a competitor from establishing a similar position in that industry; 
(ii) it offers a special timing advantages, 
(iii) it may entail less risk and even less cost. Tax benefits: Under certain conditions, tax benefits may turn out to be the underlying motive for a merger.

 Suppose when a firm with accumulated losses and unabsorbed depreciation mergers with a profitmaking firm, tax benefits are utilised better. Because its accumulated losses/unabsorbed depreciation can be set off against the profits of the profit-making firm. Utilisation of surplus funds: A firm in a mature industry may generate a lot of cash but may not have opportunities for profitable investment. In such a situation, a merger with another firm involving cash compensation often represent a more effective utilisation of surplus funds. Diversification: Diversification is yet another major advantage especially in conglomerate merger. The merger between two unrelated firms would tend to reduce business risk, which, in turn reduces the cost of capital (K0) of the firm’s earnings which enhances the market value of the firm.

1.3 LEGAL PROCEDURE OF MERGER AND ACQUISITION The following is the summary of legal procedures for merger or acquisition as per Companies Act, 1956: Permission for merger: Two or more companies can amalgamate only when amalgamation is permitted under their memorandum of association. Also, the acquiring company should have the permission in its object clause to carry on the business of the acquired company. Information to the stock exchange: The acquiring and the acquired companies should inform the stock exchanges where they are listed about the merger/acquisition. Approval of board of directors: The boards of the directors of the individual companies should approve the draft proposal for amalgamation and authorize the managements of companies to further pursue the proposal. Application in the High Court: An application for approving the draft amalgamation proposal duly approved by the boards of directors of the individual companies should be made to the High Court. 

The High Court would convene a meeting of the shareholders and creditors to approve the amalgamation proposal. The notice of meeting should be sent to them at least 21 days in advance. Shareholders’ and creditors’ meetings: the individual companies should hold separate meetings of their shareholders and creditors for approving the amalgamation scheme. At least, 75 per cent of shareholders and creditors in separate meeting, voting in person or by proxy, must accord their approval to the scheme. Sanction by the High Court: After the approval of shareholders and creditors, on the petitions of the companies, the High Court will pass order sanctioning the amalgamation scheme after it is satisfied that the scheme is fair and reasonable. If it deems so, it can modify the scheme. The date of the court’s hearing will be published in two newspapers, and also, the Regional Director of the Company Law Board will be intimated.

Filing of the Court order: After the Court order, its certified true copies will be filed with the Registrar of Companies. Transfer of assets and liabilities: The assets and liabilities of the acquired company will be transferred to the acquiring company in accordance with the approved scheme, with effect from the specified date. Payment by cash or securities:
As per the proposal, the acquiring company will exchange shares and debentures and/or pay cash for the shares and debentures of the acquired company. These securities will be listed on the stock exchange. 

A merger proposal be evaluated and investigated from the point of view of number of perspectives. The engineering analysis will help in estimating the extent of operating economies of scale, while the marketing analysis may be undertaken to estimate the desirability of the resulting distribution network. However, the most important of all is the financial analysis or financial evaluation of a target candidate.

 An acquiring firm should pursue a merger only if it creates some real economic values which may arise from any source such as better and ensured supply of raw materials, better access to capital market, better and intensive distribution network, greater market share, tax benefits, etc. The shareholders of the target firm will ordinarily demand a price for their shares that reflects the firm’s value. For prospective buyer, this price may be high enough to negate the advantage of merger. This is particularly true if several acquiring firms are seeking merger partner, and thus, bidding up the prices of available target candidates. The point here is that the acquiring firm must pay for what it gets. 

The financial evaluation of a target candidate, therefore, includes the determination of the total consideration as well as the form of payment, i.e., in cash or securities of the acquiring firm. An important dimension of financial evaluation is the determination of Purchase Price. Determining the purchase price: The process of financial evaluation begins with determining the value of the target firm, which the acquiring firm should pay. The total purchase price or the price per share of the target firm may be calculated by taking into account a host of factors. Such as assets, earnings, etc. The market price of a share of the target can be a good approximation to find out the value of the firm. Theoretically speaking, the market price of share reflects not only the current earnings of the firm, but also the ininvestor’s expectations about future growth of the firm. However, the market price of the share cannot be relied in many cases or may not be available at all. For example, the target firm may be an unlisted firm or not being traded at the stock exchange at all and as a result the market price of the share of the target firm is not available. Even in case of listed and oftenly traded company, a complete reliance on the market price of a share is not desirable because.

(i) the market price of the share may be affected by insiders trading, and (ii) sometimes, the market price does not fully reflect the firm’s financial and profitability position, as complete and correct information about the firm is nto available to the investors. Therefore, the value of the firm should be assessed on the basis of the facts and figures collected from various sources including the published financial statements of the target firm. The following approaches may be undertaken to assess the value of the target firm: 

1 Valuation based on assets: In a merger situation, the acquiring firm ‘purchases’ the target firm and, therefore, it should be ready to pay the worth of the latter. The worth of the target firm, no doubt, depends upon the tangible and intangible assets of the firm. The value of a firm may be defined as: Value = Value of all assets – External liabilities In order to find out the asset value per share, the preference share capital, if any, is deducted from the net assets and the balance is divided by the number of equity shares. It may be noted that the values of all tangible and intangible assets are incorporated here. The value of goodwill may be calculated if not given in the balance sheet, and included. However, the fictious assets are not included in the above valuation. The assets of a firm may be valued on the basis of book values or realisable values as follows:

2. Valuation based on earnings: The target firm may be valued on the basis of its earnings capacity. With reference to the capital funds invested in the target firm, the firms value will have a positive correlations with the profits of the firm. Here, the profits of the firm can either be past profits or future expected profits. However, the future expected profits may be preferred for obvious reasons. The acquiring firm shows interest in taking over the target firm for the synergistic efforts or the growth of the new firm. The estimate of future profits (based on past experience) carry synergistic element in it.

 Thus, the future expected earnings of the target firm give a better valuation. These expected profit figures are, however, accounting figures and suffer from various limitations and, therefore, should be converted into future cash flows by adjusting non-cash items.
The earnings yield gives an idea of earnings as a percentage of market value of a share. It may be noted that for this valuation, the historical earnings or expected future earnings may be considered. Earnings valuation may also be found by capitalising the total earnings of the firm as follows: Value = (Earnings/ Capitalisation rate) ×100

3. Dividend-based valuation: In the cost of capital calculation, the cost of equity capital, ke, is defined (under constant growth model) 
as: D0 = Dividend in current year D1 = Dividend in the first year g = Growth rate of dividend P0 = Initial price 
4. Capital Asset Pricing Model (CAPM)-based share valuation: 
The CAPM is used to find out the expected rate of return, Rs, as follows: Rs = IRF + (RM - IRF)β Where, Rs = Expected rate of return, IRF = Risk free rate of return, RM = Rate of Return on market portfolio, β = Sensitivity of a share to market. For example, RM is 12%, IRF is 8% and β is 1.3, the Rs is: Rs = IRF + (RM - IRF)β = 0.08 + (0.12 - 0.08) 1.3 = 13.2 If the dividend paid by the company is Rs. 20, the market price of the share is: Div 20 P0 = = = Rs. 151.51. Rs 0.132 5. Valuation based on cash flows: Valuation of 
a target firm can also be made on the basis of firm’s cash flows. In this case, the value of the target firm may be arrived at by discounting the cash flows, as in the case of NPV method of capital budgeting as follows:
Estimate the future cash inflows (i.e., Profit after tax + Noncash expenses).

 Find out the total present value of these cash flows by discounting at an appropriate rate with reference to the risk class and other factors. If the acquiring firm is agreeing to takeover the liabilities of the target firm, then these liabilities are treated as cash outflows at time zero and hence deducted form the present value of future cash inflows [as calculated in step 

(ii) [above]. 
(iv) The balancing figure is the NPV of the firm and may be considered as the maximum purchase price, which the acquiring firm 
should be ready to pay.
T 6. Other methods of valuation: There are two other methods of valuation of business. Investors provide funds to a company and expect a minimum return which is measured as the opportunity cost of the investors, or, what the investors could have earned elsewhere. If the company is earning less than this opportunity cost of the investors, the company is belying the expectations of the investors. Conversely, if it is earning more, then it is creating additional value. New concepts such as Economic Value Added (EVA) and Market Value Added (MVA) can be used along with traditional measures of Return on Net Worth (RONW) to measure the creation of shareholders value over a period.

(a) Economic Value Added: EVA is based upon the concept of economic return which refers to excess of after tax return on capital employed over the cost of capital employed. The concept of EVA, as developed by Stern Steward and Co. of the U.S., compares the return on capital employed with the cost of capital of the firm. It takes into account the minimum expectations of the shareholders. EVA is defined in terms of returns earned by the company in excess of the minimum expected return of the shareholders. EVA is calculated as the net operating profit (Earnings before Interest but after taxes) minus the capital charges *
 ((capital employed × cost of capital).

 This can be presented as follows:
EVA = EBIT - Taxes - Cost of funds employed = Net Operating Profit after Taxes - Cost of Capital Employed where, Net Operating Profit after Taxes represents the total pool of profit available to provide a return to the lenders and the shareholders, and Cost of Capital Employed is Weighted Average Cost of Capital × Average Capital employed.

So, EVA is the post-tax return on capital employed adjusted for tax shield of debt, less the cost of capital employed. It measures the profitability of a company after having taken cost of debt (Interest) is deducted in the income statement. In the calculation of EVA, the cost of equity is also deducted. The resultant figure shows as to how much has been added in value of the firm, after meeting all costs. It should be pointed out that there is more to calculation of cost of equity than simple deduction of the dividends paid. So, EVA represents the value added in excess of the cost of capital employed. EVA increases if: Operating profits grow without employing additional capital, 

i.e., through greater efficiency. Additional capital is invested in the projects that give higher returns than the cost of procuring new capital, and Unproductive capital is liquidated,
i.e., curtailing the unproductive uses of capital. EVA can be used as a tool in decision-making within an enterprise. It can help integration of customer satisfaction, operating efficiencies and, management and financial policies in a single measure. However, EVA is based on the performance of one year and does not allow for increase in economic value that may result from investing in new assets that have not yet had time to show the results. In India, EVA has emerged as a popular measure to understand and evaluate financial performance of a company. 
Several companies have started showing the EVA during a year as a part of the Annual Report. Hero Honda Ltd., BPL Ltd., Hindustan Lever Ltd., Infosys Technologies Ltd. And Balrampur Chini Mills Ltd.
Are a few of them.

(b) Market Value Added (MVA) is another concept used to measure the performance and as a measure of value of a firm. MVA is determined by measuring the total amount of funds that have been invested in the company (based on cash flows) and comparing with the current market value of the securities of the company. 
The funds invested include borrowings and shareholders funds. If the market value of securities exceeds the funds invested, the value has been created. 

1.5 FINANCING TECHNIQUES IN MERGER/ACQUISITION After the value of a firm has been determined on the basis of the preceding analysis, the next step is the choice of the method of payment to the acquired firm.
The choice of financial instruments and techniques in acquiring a firm usually has an effect on the purchasing agreement. The payment may take the form of either cash or securities, 
I.E., ordinary shares, convertible securities, deferred payment plans and tender offers.

Ordinary shares financing: When a company is considering to use ordinary shares to finance a merger, the Relative Price-Earnings (P/E) ratios of two firms are an important consideration. For instance, for a firm having a high P/E ratio, ordinary shares represent an ideal method for financing mergers and acquisitions. Similarly, the ordinary shares are more advantageous for both companies when the firm to be acquired has low P/E ratio.  Debt and Preference Shares Financing: From the foregoing it is clear that financing of mergers and acquisitions with equity shares is advantageous both to the acquiring firm and the acquired firm when the P/E ratio is high. Since, however, some firms may have a relatively lower P/E ratio as also the requirement of some investors might be different, the other types of securities, in conjunction with/in lieu of equity shares, may be used for the purpose. In an attempt to tailor a security to the requirement of investors who seek dividend/interest income in contrast to capital appreciation/growth, convertible debentures and preference shares might be used to finance merger. The use of such sources of financing has several advantages, namely,

 (i) potential earning dilution may be partially minimised by issuing a convertible security. For example, suppose the current market price of the shares of an acquiring company is Rs. 50 and the value of the acquired firm is Rs. 50,00,000. 
If the merger proposal is to be financed with equity, 1,00,000 additional shares will be required to be issued. Alternatively, convertible debentures of the face value of Rs.
100 with conversion ratio of 1.8, which would imply conversion value of 
Rs. 90 (Rs. 50 × 1.8) may be issued. To raise the required Rs. 50,00,000, 50,000 debentures convertible into 90,000 equity shares would be issued. Thus, the number of shares to be issued would be reduced by 10,000, thereby reducing the dilution in EPS that could ultimately result, if convertible security in place of equity shares was not resorted to;

 (ii) A convertible issue might serve the income objective of the shareholders of target firm without changing the dividend policy of the acquiring firm;
(iii) convertible security represents a possible way of lowering the voting power of the target company; 
(iv) convertible security may appear more attractive to the acquired firm as it combines the protection of fixed security with the growth potential of ordinary shares. In brief, fixed income securities are compatible with the needs and purpose of mergers and acquisitions. The need for changing the financing leverage and for a variety of securities is partly resolved by the use of senior securities. Deferred Payment Plan: Under this method, the acquiring firm, besides making initial payment, also undertakes to make additional payment in future years to the target firm in the event of the former being able to in increase earnings consequent also known as earn-out plan. 

There are several advantages of adopting such a plan to the acquiring firm: 
(i) It emerges to be an appropriate outlet for adjusting the difference between the amount of shares the acquiring firm is willing to issue and the amount the target firm is agreeable to accept for the business; 
(ii) in view of the fact that fewer number of shares will be issued at the time of acquisition, the acquiring firm will be able to report higher EPS immediately; 
(iii) there is built-in cushion/protection to the acquiring firm as the total payment is not made at the time of acquisition; it is contingent to the realisation of the potential/projected earnings after merger. There are various types of deferred payment plan in vogue. The arrangement eventually agreed upon depends on the imagination of the management of the two firms involved. One of the often-used plans for the purpose is base-period earn-out. Under this plan the shareholders of the target firm are to receive additional shares for a specified number of future years, if the firm is able to improve its earnings vis-à-vis the earnings of the base period 
(the earnings in the previous year before the acquisition). 

The amount becoming due for payment in shares in future years will primarily be a function of excess earnings, price-earnings ratio and the market price of the share of the acquiring firm. The basis for determining the required number of shares to be issued is Excess earnings × P/E ratio Share price (acqiring firm) To conclude, the deferred-plan technique provides a useful means by which the acquiring firm can eliminate part of the guess-work involved in purchasing a firm. In essence, it allows the merging management the privilege of hindsight. Tender Offer: An alternative approach to acquire another firm is the tender offer.

 A tender offer, as a method of acquiring firms, involves a bid by the acquiring firm for controlling interest in the acquired firm. The essence of this approach is that the purchaser approaches the shareholders of the firm rather than the management to encourage them to sell their shares generally at a premium over the current market price. Since the tender offer is a direct appeal to the shareholders, prior approval of the management of the target firm is not required. 
In case, the management of the target firm does not agree with the merger move, a number of defensive tactics can be used to counter tender offers. These defensive tactics include WHITE KNIGHTS and PAC-MANS. A white knight is a company that comes to the rescue of a firm that is being targeted for a takeover. Such a company makes its own tender offer at a higher price. 

Under Pac-mans form of tender offer, the firm under attack becomes the attacker. As a form of acquiring firms, the tender offer has certain advantages and disadvantages. The disadvantages are: 
(i) If the target firm’s management attempts to block it, the cost of executing offer may increase substantially; 
(ii) the purchasing company may fail to acquire a sufficient number of shares to meet the objective of controlling the firm. The major advantages of acquisition through tender offer include:
(i) if the offer is not blocked, it may be less expensive than the normal route of acquiring a company. This is so because it permits control by purchasing a smaller proportion of the firm’s shares; 
(ii) the fairness of the purchase price is not questionable as each shareholder individually agrees to part with his shares at the negotiated price. Merger as a Capital Budgeting Decision: Like a capital budgeting decision, merger decision requires comparison between the expected benefits (measured in terms of the present value of expected benefits/cash inflows (CFAT) from the merger) with the cost of the acquisition of the target firm.

 The acquisition costs include the payment made to the target firm’s shareholders, payment to discharge the external liabilities of the acquired firm less cash proceeds expected to the realised by the acquiring firm from the sale of certain asset (s) of the target firm. The decision criterion is ‘to go for the merger’ if Net Present Value (NPV) is positive; the decision would be ‘against the merger’ in the event of the NPV being negative.
1.5.1 Financial problems after merger and acquisition After merger and consolidation the companies face a number of financial problems. The liquidity of the companies has to be established afresh. The merging and consolidating companies pursue their own financial policies when they are working independently. A number of adjustments are required to be made in financial planning and policies so that consolidated efforts may enable to improve short-term and long-term finances of the companies. Some of the financial problems of merging and consolidating companies are discussed as follows: Cash Management: 
The liquidity problem is the usual problem faced by acquiring companies. Before merger and consolidation, the companies had their own methods of payments, cash behaviour patterns and arrangements with financial institutions. The cash pattern will have to be adjusted according to the present needs of the business. Credit Policy: 
The credit policies of the companies are unified so that.

same terms and conditions may be applied to the customers. If the market areas of the companies are different, then same old policies may be followed. The problem will arise only when operating areas of the companies are the same and same credit policy will have to be pursued. Financial Planning: 
The companies may be following different financial plans before merger and consolidation. 
The methods of budgeting and financial controls may also be different. After merger and consolidation, a unified financial planning is followed. The divergent financial controls will be unified to suit the needs of the acquiring concerns. Dividend Policy: The companies may be following different policies for paying dividend. The stockholders will be expecting higher rates of dividend after merger and consolidation on the belief that financial position and earning capacity has increased after combining the resources of the companies.

This is a ticklish problem and management will have to devise an acceptable pay-out policy. In the earlier stages of merger and consolidation it may be difficult to maintain even the old rates of dividend. Depreciation Policy: 
The companies follow different depreciation policies. The methods of depreciation, the rates of depreciation, and the amounts to be taken to revenue accounts will be different. After merger and consolidation the first thing to be decided will be about the depreciable and non-depreciable assets. The second will be about the rates of depreciation. Different assets will be in different stages of use and appropriate amounts of depreciation should be decided. 

1.5.2 Capital structure after merger and consolidation The acquiring company in case of merger and the new company in case of consolidation takes over assets and liabilities of the merging companies and new shares are issued in lieu of the old. The capital structure is bound to be affected by new changes. The capital structure should be properly balanced so as to avoid complications at a later stage. A significant shift may be in the debt-equity balance. The acquiring company will be requiring cash for making the payments. If it does not have sufficient cash then it will have to give new securities for purposes of an exchange. In all cases the balance of debt and equity will change. The possibility is that equity may be increased more than the debt. The mergers and consolidations result into the combining of profits of concerned companies. The increase in profitability will reduce risks and uncertainties. It will affect the earnings per share.

 The investors will be favourably inclined towards the securities of the company. The expectancy of dividend declarations in the future will also have a positive effect. If merging companies had different pay-out policies, then shareholders of one company will experience a change in dividend rate. The overall effect on earnings will be favourable because the increased size of business will experience a number of economies in costs and marketing which will increase profits of the company. The capital structure should be adjusted according to the present needs and requirements. The concern might sell its unrelated business, and consolidate its remaining businesses as a balanced portfolio. 

1.6 REGULATIONS OF MERGERS AND TAKEOVERS IN INDIA Mergers and acquisitions may degenerate into the exploitation of shareholders, particularly minority shareholders. They may also stifle competition and encourage monopoly and monopolistic corporate behaviour. Therefore, most countries have legal framework to regulate the merger and acquisition activities. 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. Legal measures against takeovers The Companies Act restricts an individual or a company or a group of individuals from acquiring shares, together with the shares held earlier, in a public company to 25 per cent of the total paid-up capital. Also, the Central Government needs to be intimated whenever such holding exceeds.

10 per cent of the subscribed capital. The Companies Act also provides for the approval of shareholders and the Central Government when a company, by itself or in association of an individual or individuals purchases shares of another company in excess of its specified limit. The approval of the Central Government is necessary if such investment exceeds 10 per cent of the subscribed capital of another company. These are precautionary measures against the takeover of public limited companies. Refusal to register the transfer of shares In order to defuse situation of hostile
takeover attempts, companies have been given power to refuse to register the transfer of shares. If this is done, a company must inform the transferee and the transferor within 60 days. A refusal to register transfer is permitted if: 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 In a takeover bid, the interests of all shareholders should be protected without a prejudice to genuine takeovers. It would be unfair if the same high price is not offered to all the shareholders of prospective acquired company. 

The large shareholders (including financial institutions, banks and individuals) may get most of the benefits because of their accessibility to the brokers and the takeover dealmakers. Before the small shareholders know about the proposal, it may be too late for them.
The Companies Act provides that a purchaser can force the minority shareholder to sell their shares if:
The offer has been made to the shareholders of the company; The offer has been approved by at least 90 per cent of the shareholders of the company whose transfer is involved, within 4 months of making the offer; and The minority shareholders have been intimated within 2 months from the expiry of 4 months referred above. 
If the purchaser is already in possession of more than 90 per cent of the aggregate value of all the shares of the company, the transfer of the shares of minority shareholders is possible if: The purchaser offers the same terms to all shareholders and The tenders who approve the transfer, besides holding at least 90 per cent of the value of shares, should also form at least 75 per cent of the total holders of shares.

The salient features of some of the important guidelines as follows: Disclosure of share acquisition/holding: Any person who acquires 5% or 10% or 14% shares or voting rights of the target company, should disclose of his holdings at every stage to the target company and the Stock Exchanges within 2 days of acquisition or receipt of intimation of allotment of shares. Any person who holds more than ]5% but less than 75% shares or voting rights of target company, and who purchases or sells shares aggregating to 2% or more shall within 2 days disclose such purchase or sale along with the aggregate of his shareholding to the target company and the Stock Exchanges. Any person who holds more than 15% shares or voting rights of target company and a promoter and person having control over the target company, shall within 21 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration, disclose every year his aggregate shareholding to the target company. Public announcement and open offer: An acquirer who intends to acquire shares which along with his existing shareholding would entitle him to exercise] 5% or more voting rights, can acquire such additional shares only after making a public announcement to acquire at least additional 20% of the voting capita] of target company from the shareholders through an open offer. An acquirer who holds 15% or more but less than 75% of shares or voting rights of a target company, can acquire such additional shares as would entitle him to exercise more than 5% of the voting rights in any financial year ending March 31 only after making a public announcement to acquire at least additional 20% shares of target company from the shareholders through an open offer. 

An acquirer, who holds 75% shares or voting rights of a target company, can acquire further shares or voting rights only after making a public announcement to acquire at least additional 20% shares of target company from the shareholders through an open offer. Offer price: The acquirer is required to ensure that all the relevant parameters are taken into consideration while determining the offer price and that justification for the same is disclosed in the letter of offer. The relevant parameters are: Negotiated price under the agreement which triggered the open offer.

Price paid by the acquirer for acquisition, if any, including by way of allotment in a public or rights or preferential issue during the twenty six week period prior to the date of public announcement, whichever is higher. The average of the weekly high and low of the closing prices of the shares of the target company as quoted on the stock exchange where the shares of the company are most frequently traded during the twenty six weeks or the average of the daily high and low prices of the shares as quoted on the stock exchange where the shares of the company are most frequently traded during the two weeks preceding the date of public announcement, whichever is higher. In case the shares of Target Company are not frequently traded then parameters based on the fundamentals of the company such as return on net worth of the company, book value per share, EPS etc. are required to be considered and disclosed. Disclosure: The offer should disclose the detailed terms of the offer, identity of the offerer, details of the offerer's existing holdings in the offeree company etc. and the information should be made available to all the shareholders at the same time and in the same manner.

Offer document: The offer document should contain the offer's financial information, its intention to continue the offeree company's business and to make major change and long-term commercial justification for the offer. The objectives of the Companies Act and the guidelines for takeover are to ensure full disclosure about the mergers and takeovers and to protect the interests of the shareholders, particularly the small shareholders. The main thrust is that public authorities should be notified within two days. In a nutshell, an individual or company can continue to purchase the shares without making an offer to other shareholders until the shareholding exceeds 10 per cent. Once the offer is made to other shareholders, the offer price should not be less than the weekly average price in the past 6 months or the negotiated price. 

1.8 SUMMARY Corporate restructuring refers to changes in ownership, business mix, assets mix and alliances with a motive to increase the value of shareholders. The economic considerations in terms of motives and effect of business combinations are similar but the legal procedures involved are different. A merger refers to a combination of two or more companies into one company. One or more companies may merge with an existing company or they may merge to form a new company. Mergers may be of three types:
- (i) horizontal, 
-(ii) vertical and 
-(iii) conglomerate merger. 

The advantages of merger are economics of scale, synergy, strategic benefits, tax benefits and utilisation of surplus funds. The process of financial evaluation begins with determining the value of the target firm. The different approaches may be undertaken to assess the value of the target firm namely valuation based on assets, earnings, dividend, cash flows etc. After the value of a firm has been determined the next step is the choice of the method of payment to the acquired firm. The payment take the form of either cash or securities 
i..e., ordinary shares, convertible securities, deferred payment plans and tender offers.

1.9 KEYWORDS Merger: A merger is said to occur when two or more companies combine into one company. One or more companies may merge with an existing company or they may merge to form a new company. Absorption: A combination of two or more companies into an existing company. 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. Takeover: Unwilling acquisition is called takeover. Synergy: Synergy refers to benefits other than those related to economies of scale. Lever aged Buy-outs (LBO): An acquisition of a company in which the acquisition is substantially financed through debt. Spin-off: When a company creates a new firm from the existing entity. Self-off: Selling a part of business to a third party is called sell-off.
1.10 SELF ASSESSMENT QUESTIONS What do you understand by mergers? Explain the different types of mergers. Discuss various methods of valuation at the time of merger and consolidation.

Discuss the legal and procedural aspects of a merger. Elaborate the various forms of financing a merger. Describe the financial problems faced by the concerns after mergers and consolidation. What do you mean by tender offer? Explain the provisions relating to tender offer.

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