18 mergers and_acqiusition (1)

Mergers And Acquisitions

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MERGERS
&
ACQUISITION

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… Contents …

Chapters Page No.

Chapter 1. Introduction to Mergers and Acquisition. 2-5

Chapter 2. Purpose of merger and acquisition. 6-8

Chapter 3. Types of Mergers. 9-10

Chapter 4. Advantages of mergers and takeovers. 11-14

Chapter 5. Consideration of Merger and Takeover. 15-19

Chapter 6. Reverse Merger. 20-24

Chapter 7. Procedure of Merger and Acquisition. 25-28

Chapter 8. Why Mergers fail?. 29-29

Chapter 10. Case Studies. 30-38
GlaxoSmithlime the successful merger,
Deutsche – Dresdner Bank the merger that failed,
StandChart-Grindlays: where StandChart takes over
Grindlays,
Tata-Tetley: the controversial issue of success and failure.

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Chapte
r
Introduction to Mergers and
1 Acquisition
We have been learning about the companies coming together to from another company and
companies taking over the existing companies to expand their business.

With recession taking toll of many Indian businesses and the feeling of insecurity surging over
our businessmen, it is not surprising when we hear about the immense numbers of corporate
restructurings taking place, especially in the last couple of years. Several companies have been taken
over and several have undergone internal restructuring, whereas certain companies in the same field of
business have found it beneficial to merge together into one company.

In this context, it would be essential for us to understand what corporate restructuring and
mergers and acquisitions are all about.

All our daily newspapers are filled with cases of mergers, acquisitions, spin-offs, tender offers, &
other forms of corporate restructuring. Thus important issues both for business decision and public
policy formulation have been raised. No firm is regarded safe from a takeover possibility. On the more
positive side Mergers & Acquisition’s may be critical for the healthy expansion and growth of the firm.
Successful entry into new product and geographical markets may require Mergers & Acquisition’s at
some stage in the firm's development. Successful competition in international markets may depend on
capabilities obtained in a timely and efficient fashion through Mergers & Acquisition's. Many have
argued that mergers increase value and efficiency and move resources to their highest and best uses,
thereby increasing shareholder value. .

To opt for a merger or not is a complex affair, especially in terms of the technicalities involved.
We have discussed almost all factors that the management may have to look into before going for
merger. Considerable amount of brainstorming would be required by the managements to reach a
conclusion. e.g. a due diligence report would clearly identify the status of the company in respect of the
financial position along with the networth and pending legal matters and details about various contingent
liabilities. Decision has to be taken after having discussed the pros & cons of the proposed merger & the
impact of the same on the business, administrative costs benefits, addition to shareholders' value, tax

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implications including stamp duty and last but not the least also on the employees of the Transferor or
Transferee Company.

Merger:

Merger is defined as combination of two or more companies into a single company where one
survives and the others lose their corporate existence. The survivor acquires all the assets as well as
liabilities of the merged company or companies. Generally, the surviving company is the buyer, which
retains its identity, and the extinguished company is the seller.

Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies.
All assets, liabilities and the stock of one company stand transferred to transferee company in
consideration of payment in the form of:

• Equity shares in the transferee company,
• Debentures in the transferee company,
• Cash, or
• A mix of the above modes.

Acquisition:

Acquisition in general sense is acquiring the ownership in the property. In the context of business
combinations, an acquisition is the purchase by one company of a controlling interest in the share capital
of another existing company.

Methods of Acquisition:

An acquisition may be affected by

(a) agreement with the persons holding majority interest in the company management like members
of the board or major shareholders commanding majority of voting power;

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(b) purchase of shares in open market;
(c) to make takeover offer to the general body of shareholders;
(d) purchase of new shares by private treaty;
(e) Acquisition of share capital through the following forms of considerations viz. means of cash,
issuance of loan capital, or insurance of share capital.

Takeover:

A ‘takeover’ is acquisition and both the terms are used interchangeably.
Takeover differs from merger in approach to business combinations i.e. the process of takeover,
transaction involved in takeover, determination of share exchange or cash price and the fulfillment of
goals of combination all are different in takeovers than in mergers. For example, process of takeover is
unilateral and the offeror company decides about the maximum price. Time taken in completion of
transaction is less in takeover than in mergers, top management of the offeree company being more co-
operative.

De-merger or corporate splits or division:

De-merger or split or divisions of a company are the synonymous terms signifying a movement in
the company.

What will it take to succeed?

Funds are an obvious requirement for would-be buyers. Raising them may not be a problem for
multinationals able to tap resources at home, but for local companies, finance is likely to be the single
biggest obstacle to an acquisition. Financial institution in some Asian markets are banned from leading
for takeovers, and debt markets are small and illiquid, deterring investors who fear that they might not be
able to sell their holdings at a later date. The credit squeezes and the depressed state of many Asian
equity markets have only made an already difficult situation worse. Funds apart, a successful Mergers &
Acquisition growth strategy must be supported by three capabilities: deep local networks, the abilities to
manage uncertainty, and the skill to distinguish worthwhile targets. Companies that rush in without them
are likely to be stumble.

Assess target quality:

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To say that a company should be worth the price a buyer pays is to state the obvious. But
assessing companies in Asia can be fraught with problems, and several deals have gone badly wrong
because buyers failed to dig deeply enough. The attraction of knockdown price tag may tempt
companies to skip crucial checks. Concealed high debt levels and deferred contingent liabilities have
resulted in large deals destroying value. But in other cases, where buyers have undertaken detailed due
diligence, they have been able to negotiate prices as low as half of the initial figure.

Due diligence can be difficult because disclosure practices are poor and companies often lack the
information buyer need. Moreover, most Asian conglomerates still do not present consolidated financial
statements, leaving the possibilities that the sales and the profit figures might be bloated by transactions
between affiliated companies. The financial records that are available are often unreliable, with different
projections made by different departments within the same company, and different projections made for
different audiences. Banks and investors, naturally, are likely to be shown optimistic forecasts.

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Chapte
r
Purpose of Mergers
2
and Acquisition
The purpose for an offeror company for acquiring another company shall be reflected in the
corporate objectives. It has to decide the specific objectives to be achieved through acquisition. The
basic purpose of merger or business combination is to achieve faster growth of the corporate business.
Faster growth may be had through product improvement and competitive position.

Other possible purposes for acquisition are short listed below: -

(1)Procurement of supplies:

1. to safeguard the source of supplies of raw materials or intermediary product;
2. to obtain economies of purchase in the form of discount, savings in transportation costs,
overhead costs in buying department, etc.;
3. to share the benefits of suppliers economies by standardizing the materials.

(2)Revamping production facilities:

1. to achieve economies of scale by amalgamating production facilities through more
intensive utilization of plant and resources;
2. to standardize product specifications, improvement of quality of product, expanding
3. market and aiming at consumers satisfaction through strengthening after sale
4. services;
5. to obtain improved production technology and know-how from the offeree company
6. to reduce cost, improve quality and produce competitive products to retain and
7. improve market share.

(3) Market expansion and strategy:

1. to eliminate competition and protect existing market;

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2. to obtain a new market outlets in possession of the offeree;
3. to obtain new product for diversification or substitution of existing products and to enhance the
product range;
4. strengthening retain outlets and sale the goods to rationalize distribution;
5. to reduce advertising cost and improve public image of the offeree company;
6. strategic control of patents and copyrights.

(4) Financial strength:

1. to improve liquidity and have direct access to cash resource;
2. to dispose of surplus and outdated assets for cash out of combined enterprise;
3. to enhance gearing capacity, borrow on better strength and the greater assets backing;
4. to avail tax benefits;
5. to improve EPS (Earning Per Share).

(5) General gains:

1. to improve its own image and attract superior managerial talents to manage its affairs;
2. to offer better satisfaction to consumers or users of the product.

(6) Own developmental plans:

The purpose of acquisition is backed by the offeror company’s own developmental plans.
A company thinks in terms of acquiring the other company only when it has arrived at its own
development plan to expand its operation having examined its own internal strength where it
might not have any problem of taxation, accounting, valuation, etc. but might feel resource
constraints with limitations of funds and lack of skill managerial personnel’s. It has to aim at
suitable combination where it could have opportunities to supplement its funds by issuance of
securities, secure additional financial facilities, eliminate competition and strengthen its market
position.

(7) Strategic purpose:

The Acquirer Company view the merger to achieve strategic objectives through alternative type
of combinations which may be horizontal, vertical, product expansion, market extensional or

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other specified unrelated objectives depending upon the corporate strategies. Thus, various types
of combinations distinct with each other in nature are adopted to pursue this objective like
vertical or horizontal combination.

(8) Corporate friendliness:

Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite
competitiveness in providing rescues to each other from hostile takeovers and cultivate situations
of collaborations sharing goodwill of each other to achieve performance heights through business
combinations. The combining corporates aim at circular combinations by pursuing this objective.

(9) Desired level of integration:

Mergers and acquisition are pursued to obtain the desired level of integration between the two
combining business houses. Such integration could be operational or financial. This gives birth to
conglomerate combinations. The purpose and the requirements of the offeror company go a long
way in selecting a suitable partner for merger or acquisition in business combinations.

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Chapte
Types of mergers
r
3
Merger or acquisition depends upon the purpose of the offeror company it wants to achieve.
Based on the offerors’ objectives profile, combinations could be vertical, horizontal, circular and
conglomeratic as precisely described below with reference to the purpose in view of the offeror
company.

(A) Vertical combination:

A company would like to takeover another company or seek its merger with that company to expand
espousing backward integration to assimilate the resources of supply and forward integration
towards market outlets. The acquiring company through merger of another unit attempts on
reduction of inventories of raw material and finished goods, implements its production plans as per
the objectives and economizes on working capital investments. In other words, in vertical
combinations, the merging undertaking would be either a supplier or a buyer using its product as
intermediary material for final production.

The following main benefits accrue from the vertical combination to the acquirer company i.e.
(1) it gains a strong position because of imperfect market of the intermediary products, scarcity of
resources and purchased products;
(2) has control over products specifications.

(B) Horizontal combination :

It is a merger of two competing firms which are at the same stage of industrial process. The
acquiring firm belongs to the same industry as the target company. The mail purpose of such mergers
is to obtain economies of scale in production by eliminating duplication of facilities and the
operations and broadening the product line, reduction in investment in working capital, elimination
in competition concentration in product, reduction in advertising costs, increase in market segments
and exercise better control on market.

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(C) Circular combination:

Companies producing distinct products seek amalgamation to share common distribution and
research facilities to obtain economies by elimination of cost on duplication and promoting market
enlargement. The acquiring company obtains benefits in the form of economies of resource sharing
and diversification.

(D) Conglomerate combination:

It is amalgamation of two companies engaged in unrelated industries like DCM and Modi Industries.
The basic purpose of such amalgamations remains utilization of financial resources and enlarges debt
capacity through re-organizing their financial structure so as to service the shareholders by increased
leveraging and EPS, lowering average cost of capital and thereby raising present worth of the
outstanding shares. Merger enhances the overall stability of the acquirer company and creates
balance in the company’s total portfolio of diverse products and production processes.

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Chapte Advantages of mergers
and takeovers
r
4

Mergers and takeovers are permanent form of combinations which vest in management complete
control and provide centralized administration which are not available in combinations of holding
company and its partly owned subsidiary. Shareholders in the selling company gain from the merger and
takeovers as the premium offered to induce acceptance of the merger or takeover offers much more price
than the book value of shares. Shareholders in the buying company gain in the long run with the growth
of the company not only due to synergy but also due to “boots trapping earnings”.

Motivations for mergers and acquisitions

Mergers and acquisitions are caused with the support of shareholders, manager’s ad promoters of
the combing companies. The factors, which motivate the shareholders and managers to lend support to
these combinations and the resultant consequences they have to bear, are briefly noted below based on
the research work by various scholars globally.

(1) From the standpoint of shareholders

Investment made by shareholders in the companies subject to merger should enhance in value.
The sale of shares from one company’s shareholders to another and holding investment in shares should
give rise to greater values i.e. the opportunity gains in alternative investments. Shareholders may gain
from merger in different ways viz. from the gains and achievements of the company i.e. through
(a) realization of monopoly profits;
(b) economies of scales;
(c) diversification of product line;
(d) acquisition of human assets and other resources not available otherwise;
(e) better investment opportunity in combinations.

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One or more features would generally be available in each merger where shareholders may have
attraction and favour merger.

(2) From the standpoint of managers

Managers are concerned with improving operations of the company, managing the affairs of the
company effectively for all round gains and growth of the company which will provide them better deals
in raising their status, perks and fringe benefits. Mergers where all these things are the guaranteed
outcome get support from the managers. At the same time, where managers have fear of displacement at
the hands of new management in amalgamated company and also resultant depreciation from the merger
then support from them becomes difficult.

(3) Promoter’s gains

Mergers do offer to company promoters the advantage of increasing the size of their company
and the financial structure and strength. They can convert a closely held and private limited company
into a public company without contributing much wealth and without losing control.

(4) Benefits to general public

Impact of mergers on general public could be viewed as aspect of benefits and costs to:
(a) Consumer of the product or services;
(b) Workers of the companies under combination;
(c) General public affected in general having not been user or consumer or the worker in
the companies under merger plan.

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(a) Consumers

The economic gains realized from mergers are passed on to consumers in the form of
lower prices and better quality of the product which directly raise their standard of living
and quality of life. The balance of benefits in favour of consumers will depend upon the
fact whether or not the mergers increase or decrease competitive economic and
productive activity which directly affects the degree of welfare of the consumers through
changes in price level, quality of products, after sales service, etc.

(b) Workers community

The merger or acquisition of a company by a conglomerate or other acquiring company
may have the effect on both the sides of increasing the welfare in the form of purchasing
power and other miseries of life. Two sides of the impact as discussed by the researchers
and academicians are: firstly, mergers with cash payment to shareholders provide
opportunities for them to invest this money in other companies which will generate
further employment and growth to uplift of the economy in general. Secondly, any
restrictions placed on such mergers will decrease the growth and investment activity with
corresponding decrease in employment. Both workers and communities will suffer on
lessening job opportunities, preventing the distribution of benefits resulting from
diversification of production activity.

(c) General public

Mergers result into centralized concentration of power. Economic power is to be
understood as the ability to control prices and industries output as monopolists. Such
monopolists affect social and political environment to tilt everything in their favour to
maintain their power ad expand their business empire. These advances result into
economic exploitation. But in a free economy a monopolist does not stay for a longer
period as other companies enter into the field to reap the benefits of higher prices set in
by the monopolist. This enforces competition in the market as consumers are free to
substitute the alternative products. Therefore, it is difficult to generalize that mergers
affect the welfare of general public adversely or favorably. Every merger of two or more
companies has to be viewed from different angles in the business practices which protects
the interest of the shareholders in the merging company and also serves the national

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purpose to add to the welfare of the employees, consumers and does not create hindrance
in administration of the Government polices.

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Chapte
r
Consideration of
5 Merger and Takeover
Mergers and takeovers are two different approaches to business combinations. Mergers are
pursued under the Companies Act, 1956 vide sections 391/394 thereof or may be envisaged under the
provisions of Income-tax Act, 1961 or arranged through BIFR under the Sick Industrial Companies Act,
1985 whereas, takeovers fall solely under the regulatory framework of the SEBI Regulations, 1997.

Minority shareholders rights

SEBI regulations do not provide insight in the event of minority shareholders not agreeing to the
takeover offer. However section 395 of the Companies Act, 1956 provides for the acquisition of shares
of the shareholders. According to section 395 of the Companies Act, if the offerer has acquired at least
90% in value of those shares may give notice to the non-accepting shareholders of the intention of
buying their shares. The 90% acceptance level shall not include the share held by the offerer or it’s
associates. The procedure laid down in this section is briefly noted below.

1. In order to buy the shares of non-accepting shareholders the offerer must have reached the 90%
acceptance level within 4 months of the date of the offer, and notice must have been served on
those shareholders within 2 months of reaching the 90% level.

2. The notice to the non-accepting shareholders must be in a prescribed manner. A copy of a notice
and a statutory declaration by the offerer (or, if the offerer is a company, by a director) in the
prescribed form confirming that the conditions for giving the notice have been satisfied must be
sent to the target.

3. Once the notice has been given, the offerer is entitled and bound to acquire the outstanding
shares on the terms of the offer.

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4. If the terms of the offer give the shareholders a choice of consideration, the notice must give
particulars of options available and inform the shareholders that he has six weeks from the date
of the notice to indicate his choice of consideration in writing.

5. At the end of the six weeks from the date of the notice to the non-accepting shareholders the
offerer must immediately send a copy of notice to the target and pay or transfer to the target the
consideration for all the shares to which the notice relates. Stock transfer forms executed on
behalf of the non-accepting shareholders by a person appointed by the offerer must also be sent.
Once the company has received stock transfer forms it must register the offerer as the holder of
the shares.

6. The consideration money, which is received by the target, should be held on trust for the person
entitled to shares in respect of which the sum was received.

7. Alternatively, if the offerer does not wish to buy the non-accepting shareholder’s shares, it must
still within one month of company reaching the 90% acceptance level give such shareholders
notice in the prescribed manner of the rights that are exercisable by them to require the offerer to
acquire their shares. The notice must state that the offer is still open for acceptance and specify a
date after which the right may not be exercised, which may not be less than 3 months from the
end of the time within which the offer can be accepted. If the offerer fails to send such notice it
(and it’s officers who are in default) are liable to a fine unless it or they took all reasonable steps
to secure compliance.

8. If the shareholder exercises his rights to require the offerer to purchase his shares the offerer is
entitled and bound to do so on the terms of the offer or on such other terms as may be agreed. If a
choice of consideration was originally offered, the shareholder may indicate his choice when
requiring the offerer to acquire his shares. The notice given to shareholder will specify the choice
of consideration and which consideration should apply in default of an election.
9. On application made by an happy shareholder within six weeks from the date on which the
original notice was given, the court may make an order preventing the offerer from acquiring the
shares or an order specifying terms of acquisition differing from those of the offer or make an
order setting out the terms on which the shares must be acquired.

In certain circumstances, where the takeover offer has not been accepted by the required 90% in
value of the share to which offer relates the court may, on application of the offerer, make an order

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authorizing it to give notice under the Companies Act, 1985, section 429. It will do this if it is satisfied
that:

a. the offerer has after reasonable enquiry been unable to trace one or more shareholders to whom
the offer relates;
b. the shares which the offerer has acquired or contracted to acquire by virtue of acceptance of the
offerer, together with the shares held by untraceable shareholders, amount to not less than 90% in
value of the shares subject to the offer; and
c. the consideration offered is fair and reasonable.

The court will not make such an order unless it considers that it is just and equitable to do so,
having regard, in particular, to the number of shareholder who has been traced who did accept the offer.

Alternative modes of acquisition

The terms used in business combinations carry generally synonymous connotations and can be
used interchangeably. All the different terms carry one single meaning of “merger” but each term cannot
be given equal treatment in the discussion because law has created a dividing line between ‘take-over’
and acquisitions by way of merger, amalgamation or reconstruction. Particularly the takeover
Regulations for substantial acquisition of shares and takeovers known as SEBI (Substantial Acquisition
of Shares and Takeovers) Regulations, 1997 vide section 3 excludes any attempt of merger done by way
of any one or more of the following modes:

(a) by allotment in pursuant of an application made by the shareholders for right issue and under
a public issue;

(b) preferential allotment made in pursuance of a resolution passed under section 81(1A) of the
Companies Act, 1956;

(c) allotment to the underwriters pursuant to underwriters agreements;

(d) inter-se-transfer of shares amongst group, companies, relatives, Indian promoters and Foreign
collaborators who are shareholders/promoters;

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(e) acquisition of shares in the ordinary course of business, by registered stock brokers, public
financial institutions and banks on own account or as pledges;

(f) acquisition of shares by way of transmission on succession or inheritance;

(g) acquisition of shares by government companies and statutory corporations;

(h) transfer of shares from state level financial institutions to co-promoters in pursuance to
agreements between them;

(i) acquisition of shares in pursuance to rehabilitation schemes under Sick Industrial Companies
(Special Provisions) Act, 1985 or schemes of arrangements, mergers, amalgamation, De-
merger, etc. under the Companies Act, 1956 or any other law or regulation, Indian or
Foreign;

(j) acquisition of shares of company whose shares are not listed on any stock exchange.
However, this exemption in not available if the said acquisition results into control of a listed
company;

(k) such other cases as may be exempted from the applicability of Chapter III of SEBI
regulations by SEBI.

The basic logic behind substantial disclosure of takeover of a company through acquisition of
shares is that the common investors and shareholders should be made aware of the larger financial stake
in the company of the person who is acquiring such company’s shares. The main objective of these
Regulations is to provide greater transparency in the acquisition of shares and the takeovers of
companies through a system of disclosure of information.

Escrow account

To ensure that the acquirer shall pay the shareholders the agreed amount in redemption of his
promise to acquire their shares, it is a mandatory requirement to open escrow account and deposit therein
the required amount, which will serve as security for performance of obligation.

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The Escrow amount shall be calculated as per the manner laid down in regulation 28(2).
Accordingly:
For offers which are subject to a minimum level of acceptance, and the acquirer does want to
acquire a minimum of 20%, then 50% of the consideration payable under the public offer in cash shall
be deposited in the Escrow account.

Payment of consideration

Consideration may be payable in cash or by exchange of securities. Where it is payable in cash
the acquirer is required to pay the amount of consideration within 21 days from the date of closure of the
offer. For this purpose he is required to open special account with the bankers to an issue (registered
with SEBI) and deposit therein 90% of the amount lying in the Escrow Account, if any. He should make
the entire amount due and payable to shareholders as consideration. He can transfer the funds from
Escrow account for such payment. Where the consideration is payable in exchange of securities, the
acquirer shall ensure that securities are actually issued and dispatched to shareholders in terms of
regulation 29 of SEBI Takeover Regulations.

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Chapte
Reverse Merger
r
6
Generally, a company with the track record should have a less profit earning or loss making but
viable company amalgamated with it to have benefits of economies of scale of production and marketing
network, etc. As a consequence of this merger the profit earning company survives and the loss making
company extinguishes its existence. But in many cases, the sick company’s survival becomes more
important for many strategic reasons and to conserve community interest. The law provides
encouragement through tax relief for the companies that are profitable but get merged with the loss
making companies. Infact this type of merger is not a normal or a routine merger. It is, therefore, called
as a Reverse Merger.

The allurement for such mergers is the tax savings under the Income-tax Act, 1961. Section 72A
of the Act ensures the tax relief which becomes attractive for amalgamations of sick company with a
healthy and profitable company to take the advantage of carry forward losses. Taking advantage of the
provisions of section 72A through merger or amalgamation is known as reverse merger, which gives
survival to the sick unit by merging it with the healthy unit. The healthy unit extincts loosing its name
and the surviving sick company retains its name. Companies to take advantage of the section follow this
route but after a year or so change their names to the one of the healthy company as were done amongst
others by Kirloskar Pneumatics Ltd. The company merged with Kirloskar Tractors Ltd, a sick unit and
initially lost its name but after one year it changed its name as was prior to merger.

Reverse Merger under Tax Laws

Section 72A of the Income-tax Act, 1961 is meant to facilitate rejuvenation of sick industrial
undertaking by merging with healthier industrial companies having incentive in the form of tax savings
designed with the sole intention to benefit the general public through continued productive activity,
increased employment avenues and generation of revenue.

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(1) Background

Under the existing provisions of the Income-tax Act, so much of the business loss of a year as
cannot be set off by him against the profits of the following year from any business carried on by him. If
the loss cannot be so wholly set off, the amount not so set off can be carried forward to the next
following year and so on, up to a maximum of eight assessment years immediately succeeding the
assessment year for which the loss was first computed. The benefit of carry forward and set off of
business loss is, however, not available unless the business in which the loss was originally sustained is
continued to be carried on by the assessee. Further, only the assessee who incurred the loss by his
predecessor. Similarly, if a business carried on one assessee is taken over by another, the unabsorbed
depreciation allowance due to the predecessor in business and set off against his profits in subsequent
years. In view of these provisions, the accumulated business loss and unabsorbed depreciation allowance
of a company which merges with another company under a scheme of amalgamation cannot be carried
forward and set off by the latter company against its profits.

The very purpose of section 72A is to revive the business of an undertaking, which is financially
non-viable and to bring it back to health. Sickness among industrial undertakings is a matter of grave
national concern. Experience has shown that taking over of such units by Government is not always the
most satisfactory or the most economical solution. The more effective course suggested was to facilitate
the amalgamation of sick industrial units with sound ones by providing incentives and removing
impediments in the way of such amalgamation. To save the Government from social costs in terms of
loss of production and employment and to relieve the Government of the uneconomical burden of taking
over and running sick industrial units is one of the motivating factors in introducing section 72A. To
achieve this objective so as to facilitate the merger of sick industrial units with sound one, the general
rule of carry forward and set off of accumulated losses and unabsorbed depreciation allowance of
amalgamating company by the amalgamated company was statutorily related. By a deeming fiction, the
accumulated loss or the unabsorbed depreciation of the amalgamating is treated to be the loss or, as the
case may be, allowance for depreciation of the amalgamated company for the previous year in which
amalgamation was effected.

There are three statutory conditions which are to be fulfilled under section 72A(1) for the
benefits prescribed therein to be available to the amalgamated company, namely –
(i) The amalgamating company was, immediately before such amalgamation, financially non-viable
by reason of its liabilities, losses and other relevant factors;
(ii) The amalgamation is in the public interest;

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(iii) Such other conditions as the Central Government may by notification in the Official Gazette,
specify, to ensure that the benefit under this section is restricted to amalgamation, which would
facilitate the rehabilitation or revival of the business of amalgamating company.

(2) Reverse merger

As it can be now understood, a reverse merger is a method adopted to avoid the stringent
provisions of Section 72A but still be able to claim all the losses of the sick unit. For doing so, in case of
a reverse merger, instead of a healthy unit taking over a sick unit, the sick unit takes over/ amalgamates
with the healthy unit.

High Court discussed 3 tests for reverse merger:
a. assets of transferor company being greater than transferee company;
b. equity capital to be issued by the transferee company pursuant to the acquisition
exceeding its original issued capital, and
c. the change of control in the transferee company clearly indicated that the present
arrangement was an arrangement, which was a typical illustration of takeover by reverse
bid.

Court held that prime facie the scheme of merging a prosperous unit with a sick unit could not be
said to be offending the provisions of section 72A of the Income Tax Act, 1961 since the object
underlying this provision was to facilitate the merger of sick industrial unit with a sound one.

(3) Salient features of reverse merger under section 72A

1. Amalgamation should be between companies and none of them should be a firm of partners or
sole-proprietor. In other words, partnership firm or sole-proprietary concerns cannot get the
benefit of tax relief under section 72A merger.

2. The companies entering into amalgamation should be engaged in either industrial activity or
shipping business. In other words, the tax relief under section 72A would not be made
available to companies engaged in trading activities or services.

3. After amalgamation the “sick” or “financially unviable company” shall survive and other
income generating company shall extinct. In other words essential condition to be fulfilled is

- 24 –


that the acquiring company will be able to revive or rehabilitate having consumed the healthy
company.

4. One of the merger partner should be financially unviable and have accumulated losses to
qualify for the merger and the other merger partner should be profit earning so that tax relief to
the maximum extent could be had. In other words the company which is financially unviable
should be technically sound and feasible, commercially and economically viable but
financially weak because of financial stringency or lack of financial recourses or its liabilities
have exceeded its assets and is on the brink of insolvency. The second requisite qualification
associated with financial unavailability is the accumulation of losses for past few years.

5. Amalgamation should be in the public interest i.e. it should not be against public policy, should
not defeat basic tenets of law, and must safeguard the interest of employees, consumers,
creditors, customers and shareholders apart from promoters of company through the revival of
the company.

6. The merger must result into following benefit to the amalgamated company i.e. (a) carry
forward of accumulated business loses of the amalgamated company; (b) carry forward of
unabsorbed depreciation of the amalgamating company and (c) accumulated loss would be
allowed to be carried forward set of for eight subsequent years.

7. Accumulated loss should arise from “Profits and Gains from business or profession” and not
be loss under the head “Capital Gains” or “Speculation”.

8. For qualifying carry forward loss, the provisions of section 72 should have not been
contravened.

9. Similarly for carry forward of unabsorbed depreciation the conditions of section 32 should not
have been violated.

10. Specified authority has to be satisfied of the eligibility of the company for the relief under
section 72 of the Income Tax Act. It is only on the recommendations of the specified authority
that Central Government may allow the relief.

- 25 –


11. The company should make an application to a “specified authority” for requisite
recommendation of the case to the Central Government for granting or allowing the relief.

12. Procedure for merger or amalgamation to be followed in such cases is same as in any other
cases. Specified Authority makes recommendation after taking into consideration the court’s
direction on scheme of amalgamation.

- 26 –


Procedure for
Chapte
Takeover
7
r
and Acquisition
Public announcement:

To make a public announcement an acquirer shall follow the following procedure:

1. Appointment of merchant banker:

The acquirer shall appoint a merchant banker registered as category – I with SEBI to advise him
on the acquisition and to make a public announcement of offer on his behalf.

2. Use of media for announcement:

Public announcement shall be made at least in one national English daily one Hindi daily and
one regional language daily newspaper of that place where the shares of that company are listed and
traded.

3. Timings of announcement:

Public announcement should be made within four days of finalization of negotiations or entering
into any agreement or memorandum of understanding to acquire the shares or the voting rights.

- 27 –


4. Contents of announcement:

Public announcement of offer is mandatory as required under the SEBI Regulations. Therefore,
it is required that it should be prepared showing therein the following information:
(1) paid up share capital of the target company, the number of fully paid up and partially
paid up shares.

(2) Total number and percentage of shares proposed to be acquired from public subject
to minimum as specified in the sub-regulation (1) of Regulation 21 that is:
a) The public offer of minimum 20% of voting capital of the company to the
shareholders;
b) The public offer by a raider shall not be less than 10% but more than 51% of
shares of voting rights. Additional shares can be had @ 2% of voting rights in
any year.

(3) The minimum offer price for each fully paid up or partly paid up share;

(4) Mode of payment of consideration;

(5) The identity of the acquirer and in case the acquirer is a company, the identity of the
promoters and, or the persons having control over such company and the group, if
any, to which the company belong;

(6) The existing holding, if any, of the acquirer in the shares of the target company,
including holding of persons acting in concert with him;

(7) Salient features of the agreement, if any, such as the date, the name of the seller, the
price at which the shares are being acquired, the manner of payment of the
consideration and the number and percentage of shares in respect of which the
acquirer has entered into the agreement to acquirer the shares or the consideration,
monetary or otherwise, for the acquisition of control over the target company, as the
case may be;

- 28 –


(8) The highest and the average paid by the acquirer or persons acting in concert with
him for acquisition, if any, of shares of the target company made by him during the
twelve month period prior to the date of the public announcement;

(9) Objects and purpose of the acquisition of the shares and the future plans of the
acquirer for the target company, including disclosers whether the acquirer proposes
to dispose of or otherwise encumber any assets of the target company:
Provided that where the future plans are set out, the public announcement shall
also set out how the acquirers propose to implement such future plans;

(10) The ‘specified date’ as mentioned in regulation 19;

(11) The date by which individual letters of offer would be posted to each of the
shareholders;

(12) The date of opening and closure of the offer and the manner in which and the date by
which the acceptance or rejection of the offer would be communicated to the share
holders;

(13) The date by which the payment of consideration would be made for the shares in
respect of which the offer has been accepted;

(14) Disclosure to the effect that firm arrangement for financial resources required to
implement the offer is already in place, including the details regarding the sources of
the funds whether domestic i.e. from banks, financial institutions, or otherwise or
foreign i.e. from Non-resident Indians or otherwise;

(15) Provision for acceptance of the offer by person who own the shares but are not the
registered holders of such shares;

(16) Statutory approvals required to obtained for the purpose of acquiring the shares under
the Companies Act, 1956, the Monopolies and Restrictive Trade Practices Act, 1973,
and/or any other applicable laws;

(17) Approvals of banks or financial institutions required, if any;

- 29 –


(18) Whether the offer is subject to a minimum level of acceptances from the
shareholders; and

(19) Such other information as is essential fort the shareholders to make an informed
design in regard to the offer.

- 30 –


Why Mergers fail?
Chapte
r
8

Why Mergers Fail?

Revenue deserves more attention in mergers; indeed, a failure to focus on this important factor may
explain why so many mergers don’t pay off. Too many companies lose their revenue momentum as they
concentrate on cost synergies or fail to focus on post merger growth in a systematic manner. Yet in the
end, halted growth hurts the market performance of a company far more than does a failure to nail costs.

- 31 –


Chapte
Case Studies
r
9

CASE STUDY 1

GlaxoSmithKline Pharmaceuticals Limited, India (Merger
Success).
Mumbai -- Glaxo India Limited and SmithKline Beecham Pharmaceuticals (India) Limited have
legally merged to form GlaxoSmithKline Pharmaceuticals Limited in India (GSK). It may be recalled
here that the global merger of the two companies came into effect in December 2000.

Commenting on the prospects of GSK in India, Vice Chairman and Managing Director,
GlaxoSmithKline Pharmaceuticals Limited, India, Mr. V Thyagarajan said, “The two companies that
have merged to become GlaxoSmithKline in India have a great heritage – a fact that gets reflected in
their products with strong brand equity.” He added, “The two companies have a long history of
commitment to India and enjoy a very good reputation with doctors, patients, regulatory authorities and
trade bodies. At GSK it would be our endeavor to leverage these strengths to further consolidate our
market leadership.”

GlaxoSmithKline, India

The merger in India brings together two strong companies to create a formidable presence in the
domestic market with a market share of about 7 per cent.

- 32 –


With this merger, GlaxoSmithKline has increased its reach significantly in India. With a field
force of over 2,000 employees and more than 5,000 stockiest, the company’s products are available
across the country. The enhanced basket of products of GlaxoSmithKline, India will help serve patients
better by strengthening the hands of doctors by offering superior treatment and healthcare solutions.

GlaxoSmithKline, Worldwide
GlaxoSmithKline plc is the world’s leading research-based pharmaceutical and healthcare
company. With an R&D budget of over ₤2.3 billion (Rs.16, 130 crores), GlaxoSmithKline has a
powerful research and development capability, encompassing the application of genetics, genomics,
combinatorial chemistry and other leading edge technologies.

A truly global organization with a wide geographic spread, GlaxoSmithKline has its corporate
headquarters in the West London, UK. The company has over 100,000 employees and supplies its
products to 140 markets around the world. It has one of the largest sales and marketing operations in the
global pharmaceutical industry.

- 33 –


CASE STUDY 2
Deutsche – Dresdner Bank (Merger Failure)
The merger that was announced on march 7, 2000 between Deutsche Bank and Dresdner Bank,
Germany’s largest and the third largest bank respectively was considered as Germany’s response to
increasingly tough competition markets.

The merger was to create the most powerful banking group in the world with the balance sheet
total of nearly 2.5 trillion marks and a stock market value around 150 billion marks. This would put the
merged bank for ahead of the second largest banking group, U.S. based citigroup, with a balance sheet
total amounting to 1.2 trillion marks and also in front of the planned Japanese book mergers of
Sumitomo and Sukura Bank with 1.7 trillion marks as the balance sheet total.

The new banking group intended to spin off its retail banking which was not making much profit
in both the banks and costly, extensive network of bank branches associated with it.

The merged bank was to retain the name Deutsche Bank but adopted the Dresdner Bank’s green
corporate color in its logo. The future core business lines of the new merged Bank included investment
Banking, asset management, where the new banking group was hoped to outside the traditionally
dominant Swiss Bank, Security and loan banking and finally financially corporate clients ranging from
major industrial corporation to the mid-scale companies.

With this kind of merger, the new bank would have reached the no.1 position of the US and
create new dimensions of aggressiveness in the international mergers.
But barely 2 months after announcing their agreement to form the largest bank in the world, negotiations
for a merger between Deutsche and Dresdner Bank failed on April 5, 2000.

The main issue of the failure was Dresdner Bank’s investment arm, Kleinwort Benson, which the
executive committee of the bank did not want to relinquish under any circumstances.

In the preliminary negotiations it had been agreed that Kleinwort Benson would be integrated
into the merged bank. But from the outset these considerations encountered resistance from the asset
management division, which was Deutsche Bank’s investment arm.

- 34 –


Deutsche Bank’s asset management had only integrated with London’s investment group Morgan
Grenfell and the American Banker’s trust. This division alone contributed over 60% of Deutsche Bank’s
profit. The top people at the asset management were not ready to undertake a new process of integration
with Kleinwort Benson. So there was only one option left with the Dresdner Bank i.e. to sell Kleinwort
Benson completely. However Walter, the chairman of the Dresdner Bank was not prepared for this. This
led to the withdrawal of the Dresdner Bank from the merger negotiations.

In economic and political circles, the planned merger was celebrated as Germany’s advance into
the premier league of the international financial markets. But the failure of the merger led to the disaster
of Germany as the financial center.

- 35 –


CASE STUDY 3
Standard Chartered Grindlay’s (Acquisition Success)
It has been a hectic year at London-based Standard Chartered Bank, going by its acquisition
spree across the Asia-Pacific region. At the helm of affairs, globally, is Rana Talwar, group CEO. The
quintessential general, he knew what he was up against when he propounded his 'emerging stronger'
strategy - of growth through consolidation of emerging markets - for the turn of the Millennium: loads of
scepticism. The central issue: Stan Chart’s August 2000 acquisition of ANZ Grindlays Bank, for $1.3
billion.

Everyone knows that acquisition is the easy part, merging operations is not. And recent history has
shown that banking mergers and acquisitions (MERGERS & ACQUISITION’s), in particular, are not as
simple to execute as unifying balance sheets. Can Stan Chart’s proposed merger with ANZ Grindlays be
any different?

The '1' refers to the new entity, which will be India's No 1 foreign bank once the integration is
completed. This should take around 18 months; till then, ANZ Grindlays will exist separately as
Standard Chartered Grindlays (SCG). The '2' and '3' are Citibank and Hong Kong and Shanghai Banking
Corp (HSBC), India's second and third largest foreign banks, respectively.

That makes the new entity the world's biggest 'emerging markets' bank. By way of strengths, it
will have treasury operations that will probably go unchallenged as the country's most sophisticated.
Best of all, it will be a dynamic bank. Thanks to pre-merger initiatives taken by both banks, it could per-
haps boast of the country's fastest growing retail-banking business.

StanChart is rated highly on other parameters too. It is currently targeting global cost-savings of
$108 million in 2001, having reported a profit-before-tax of $650 million in the first half of 2000, up 31
per cent from the same period last year. Net revenue increased 6 per cent to $2 billion for the same
period. Consumer banking, a typically low-profit business which accounted for less than 40 per cent of
its global operating profits till four years ago, now brings in 55 per cent of profits. So the company's
global report card looks fairly good.

- 36 –


StanChart knows it mustn't let its energy dissipate. It has been growing at a claimed annual rate of
25 per cent in the last two years, well over the industry average of below 10 per cent. But maintaining
this pace won't prove easy, with Citibank and HSBC just waiting to snip at it. The ANZ Grindlays
acquisition had happened just before that, though the process started in early 1999, at Stan Chart’s
headquarters in London. At first, it was just talk of a strategic tie-up with ANZ Grindlays, which had the
same colonial British antecedents.

But this plan was abandoned when it became evident that all decision-making would vacillate
between Melbourne and London, where the two are headquartered. By December, ANZ had expressed a
willingness to sell out, and StanChart initiated the due-diligence proceedings. It wasn't until March that a
few senior Indian bank executives were let into the secret. Now, it's time to get going. A new vehicle,
navigators in place, engines revving and map charted, the road ahead is challenging and full of promise.
To steer clear of trouble is the only caution advised by industry analysts, as the two banks integrate their
businesses. Sceptics don't see how StanChart can really be greater than the sum of its parts.

The aggression, though, is not as raw as it sounds. Behind it all is a strategy that everyone at
StanChart seems to be in synchrony with. And behind that strategy is Talwar, very much the originator
of the oft-repeated phrase uttered by every executive - "getting the right footprint". The other key words
that tend to find their way into every discussion are 'focus' and 'growth'.

StanChart India's net non-performing loans, as a percentage of net total advances, is reported at
just 2 per cent for 1999-2000. In terms of capital adequacy too, the banks are doing fine. StanChart has
a capital base of 9.5 per cent of its risk-weighted assets, while SCG has 10.9 per cent. So, with or
without a safety net provided by the global group, the Indian operations are on firm ground.

- 37 –


CASE STUDY 4
TATA – TETLEY (Controversial Issue over Success And
Failure).
The Tata group was infusing a fresh 30 million pounds into Tata tea that had been used to buy an
85.7% stake in the UK-based Tetley last year. Already high on a heady brew of a fresh buy and caffeine,
most missed what Krishna Kumar's statement meant.

Tata Tea’s much hyped acquisition of Tetley, one of the world’s biggest tea brands, isn’t
proceeding according to the plan. 15 months ago, the Kolkata based Rs 913 crore Tata Tea’s buyout of
the privately held The Tetley Group for Rs 1843 crore had stunned corporate watchers and investment
bankers alike. It was a coup! An Indian company had used a leveraged buyout to snag one of the
Britain’s biggest ever brands. It was by far, the biggest ever leveraged buyout by an Indian company.

Tata Tea didn’t pay cash upfront. Instead, it invested 70 million pounds as equity capital to set up
Tata Tea. It borrowed 235 million to buy the Tetley stake. The plan was that Tetley’s cash flows would
be insulated from the debt burden.

When Tata Tea took the big gamble to buy Tetley, its intent was very clear. The company had
established a firm foothold in the domestic market and had a controlling position in growing tea. Going
global looked like the obvious thing to do. With Tetley, the second largest brand after Lipton in its bag,
Tata Tea looked ready to set the Thames on fire.

Right from the start, Tetley was never a easy buy. In 1996, Allied Domecq, the liquor and retail
conglomerate, had put Tetley on the block. Even then Tata Tea, nestle, Unilever and Sara lee had put in
bids, all under 200 million pounds. Allied wanted to cash on the table. Tata Tea didn’t have enough of
its own. The others bids also did not go through. Eventually, Tetley group together with a consortium of
financial investors like Prudential and Schroders, bought the entire equity stake for 190 million pounds
in all cash deal. Two years later, Tetley went for an IPO, hoping to raise 350-400 million pounds. But
the IPO never took place. Soon afterwards, the investors began looking for exit options. Tetley was once
again on the block.

- 38 –


It was until Feb 2000 that the due diligence was completed. By this time, the Tata's were ready
with their offer. They would pay 271 million pounds to buy the entire Tetley equity and the funds would
go towards first paying off Tetley’s 106 million debt. The balance would go the owners.

The offer price did not include rights to Tetley coffee business, which was sold to the US-based
Rowland Coffee Roasters and Mother Parker’s Tea and Coffee in Feb 2000 for 55 million pounds.

For Tetley new owners, too, the problems were only just beginning. The deal hinged on Tetley’s
ability, over and above covering its own debts, to service the loans Tata Tea had taken for the
acquisition. That’s where reality bites.

Consider the facts. When Tata Tea acquired Tetley through Tata Tea, it sunk in 70 million
pounds as equity and borrowed 235 million pounds fro ma consortium to finance the deal. Implicit in the
LBO was that Tetley’s future cash flows would fund the SPV’s interest and principal repayment
requirements. At an average interest rate of 11.5%, Tetley needed to generate 22 million pounds in
interest alone on a loan o 190 million pounds. Add to this the interest on the high cost vendor loan notes
of 30 million pounds—it worked out to be 4.5 million and the charges on the working capital portion,
amounting to 2 million pounds per annum. All this works out to about 28 million pounds in interest
alone per year.

At the same time, it also has to pay back the principal of 110 million pounds over a nice period
through half yearly installments. This works out to 12 million pounds per year. If you were to assume
that depreciation and restructuring charges were pegged at last year’s levels, the bill tots up to 48 million
pounds a year. In FY 1999, the Tetley’s cash flows were 29 million pounds.

Some of the problems could have been obviated if Tetley’s cash flows had increased by 40 % in
FY 2001 over the previous year. That way, the company would have covered both its own commitments
as well as of the Tata's. But the situation worsened. Major UK retailers clamped down on grocery prices
last year. That substantially reduced Tetley’s pricing flexibility.

Besides, the UK tea markets have been under pressure for some time now. According to the UK
government’s national food survey, there has been a substantial fall in the consumption of mainstream
teas- tea-bag black teas drunk with milk and sugar. Also the tea drinking population in UK has come
down from 77.1% to 68.3% in 1999. On the other hand, natural juices and coffee have consistently
increased their market share.

- 39 –


So, when it was confronted by Tetley’s sliding performance, what options did Tata Tea have? On
its own, it could not do much. The last year has been one of the worst years for the Indian tea industry
and Tata Tea has also been affected. The drop in tea prices and a proliferation of smaller brands in the
organized segment have taken toll on Tata Tea’s performance. In FY 2001, Tata Tea’s net profit fell by
19.59% from Rs 124.63 crore to Rs 100.21 crore. Income from operations declined by 8.72%.

But letting Tetley sink under the weight of the interest burden would have been an unthinkable
option, given the prestige attached to the deal.

Thus from the above case we infer that Tata had to shell out a lot of money to cover all the debts
of Tetley which was found not worthy enough by the general public.

But Tata still calls it to be a success whereas in reality it is a failure.

- 40 –


NOTES
Table 5: Acquisitions in the New Series Industries.
In Acquirer/Bidder Target Date Motive
d
us
tr
y
Adver WPP Group plc Equus June 1996 Entry in Indian market
tising McCann-Erickson McKann Erikson India March 1998 Buyout joint venture partner
Agenc Worldwide
y
WPP Group plc Hindustan Thompson June 1998 Buyout joint venture partner
Associates
Bates Worldwidde Bates Carion Jan 2000 Buyout joint venture partner
Trave Carlson Wagonlit Ind Travels August 1999 Entry in Indian market
l Kuoni, Sita Travels Jan 2000 Entry in Indian market
Agenc Switzerland
y
Kuoni Travel SOTC May 1997 Increase stake
Busin Jardine Flemming Karvy Consultants April 1996 Entry in Indian market
ess Coopers and SB Billimoria June 1996 Entry in Indian market
Servic Laybrand
es
Ernst and Young SR Batliboi Jan 1997 Buyout joint venture partner
Watson Wyatt Wyatt India March 1998 Buyout joint venture partner
Publi Macmillan UK Macmillan India May 1997 Increase stake
shing
McGraw Hill Tata McGraw Hill April 1996 Buyout joint venture partner
Polygram Polygram India June 1999 Buyout joint venture partner
International
Holding Bv
Softw Baring India BFL Software June 1998 Entry in Indian market
are Investments,
Mauritius
Baring Private Synergy Log-In Systems April 1999 Entry in Indian market
Equity Partners
(India)
Martek Holdings Mascon Global Ltd. July 1999 Entry in Indian market
Incorporation
IBM IBM Global Services Sept 1999 Buyout joint venture partner
IBM Tata IBM Sept 1999 Buyout joint venture partner

- 41 –


- 42 –


NOTES
Table 1: Share of M and A’s in FDI
Inflows in India.
Year FDI Inflows M and A Funds Share of M and A
($ million) ($ million) Funds in Inflows
(Percent)
1997 3200 1300 40.6
1998 2900 1000 34.5
1999
(Jan-Mar) 1400 500 35.7
Total 7100 2800 39.4
Source: Economic Times December 23,1998 and June 21,1999

Table 2: MNE Related M and A’s in India.
Year Mergers Acquisitions Total
1993-94 4 9 13
1994-95 - 7 7
1995-96 - 12 12
1996-97 2 46 48
1997-98 4 61 65
1998-99 2 30 32
1999-2000
(up to Jan 2000) 5 74 79
Total 17 239 256
Source: Kumar based on RIS-ICDRC Database

Table 3: Consideration involved in Select
MNE Related Acquisition.
Total Percent
Consideration Share
(Rs. Million)
All deals (87) 87449 100.00
Top 10 deals 50371 66.75
Top 20 deals 6999 80.04
Bottom 20 deals 773 00.79
Source: Kumar based on RIS-ICDRC Database

- 43 –


Table 4: Average size of Acquisition
Deals
Types of Number Amount Average per deal
Acquirer (Rs. Million) (Rs. Million)
Existing MNE
affiliates 19 13,661 718
Foreign
corporations 36 37,360 1,038
Foreign parents
of existing
affiliates 32 36,420 1,138
All cases 87 87,440 1,005
Source: Kumar based on RIS-ICDRC Database.

- 44 –


NOTES

- 45 –

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