Mergers & Acquisition
Acquisition also known as Takeover is
the buying of one company( the target)
by another ( the acquirer)
Can be friendly – through negotiation
and consent or Hostile (Black Knight)through creeping acquisition (Dawn
raids)
When a smaller company acquires
management control over a bigger
company it is referred as “ Reverse
Takeover”
Mergers & Acquisition
Types of Acquisitions
The buyer buys the Shares and
therefore the control of the target
company, with all liabilities and risks(
tax neutral)
The buyer buys the Assets by “ cheery
picking”. The cash received by the
Target company is paid to their
shareholders as dividend or through
liquidation settlement.
(has tax implications)
Mergers & Acquisition
Merger is a combination of two
companies into one larger company.
Involve Stock swap or Cash payment
May result in a new company
name/new branding.
The term merger is used as it is
softer than acquisition sometimes.
Mergers & Acquisition
Classification of Mergers
Horizontal Merger:- where two merging
companies produce similar products in the
same industry.
Vertical Merger:- when two firms each
working at different stages in the
production of the same goods, combine.
Congeneric Mergers:-where two merging
firms are in the same general industry, but
they have no mutual buyer/customer or
supplier relationships, such as a merger
between a bank and a leasing company.
Conglomerate Mergers:- take place when
the two firms operate in different industries.
Reverse Merger: - When a bigger company
merges with a smaller company it is
referred as “ Reverse Merger”
Mergers & Acquisition
Classification of Mergers
Accretive Mergers:- When an
acquiring company's EPS increases.
Dilutive Mergers- When an acquiring
company's EPS decreases.
Mergers & Acquisition
Is it always a success story ?
Very often results in a net loss of Value
due to:– Incompatibility of technology, equipments,
corporate culture.
– Inadequate research or concealment of losses
or liabilities.
– Overlapping subsidiaries or redundant staff
– Disrupting employee culture/confidence.
A successful merger is one which increases
shareholder value faster or prevents
deterioration in Value.
Mergers & Acquisition
Financing M & A
By Cash payments:- target comes under
indirect control of the bidders
shareholders alone. Makes sense in
market with down trends in interest rates.
This has lesser chances of EPS dilution for
the acquiring company, but strains cash
flows.
By Issue of Bonds
By Leveraged Buy-out
By Hybrid financing.
By deferred payment plan.
By MBO from owners.
Mergers & Acquisition
Motives behind Mergers which add
shareholders value:– Economies of scale.
– Increased revenue/increased market
share
– Cross selling
– Synergy- use of complementary
resources
– Tax benefits
– Geographical and other diversification
– Resource transfer
Mergers & Acquisition
Motives behind Mergers which do
not add value :– Diversification – Management issues
– Manager’s overconfidence on
expectations- higher payments.
– Empire Building syndrome
– Manager’s compensation- % of profits
or profit per share ?
– Vertical Integration-cheaper costs/lower
revenue. Competitors reluctance to
supply.
Mergers & Acquisition
Financial synergies gained by merger
are:–
–
–
–
–
–
–
Better credit worthiness
Reduction in cost of capital
Increase in debt capacity
Increase in P/E ratio and value per share.
Low floatation cost.
Better access to capital.
Sometimes demergers, spin-offs, spin-outs
splits companies into two, generating a second
company separately listed in stock exchange to
unlock values.
Mechanics of Merger- Legal
Procedure
 Examination of Object Clauses
 Intimation to Stock Exchanges
 Approval of the Draft Amalgamation Proposal by
the respective boards
 Application to the High Court
 Dispatch of Notice to Shareholders and Creditors
 Holding of Meetings of Shareholders and Creditors
 Petition to the court for confirmation and passing of
court orders
 Filing the order with the Registrar
 Transfers of Assets and Liabilities
 Issue of Shares and Debentures
Amalgamation in the nature of MergerConditions to be met
All assets and liabilities of transferor company
should become the assets and liabilities of transferee
company.
Shareholders holding not less than 90% of the face
value of shares of the transferor company should
become the shareholders of the transferee company.
Consideration to be paid by transferee company by
way of equity shares. Cash can be paid to dissenting
shareholders.
Business of the transferor company is intended to
be carried on by transferee company.
Transferee company to incorporate in its Balance
sheet the book values of, assets & liabilities of the
transferor company ( including reserves & profits)
with changes only for change in accounting policies.
IF ABOVE CONDITIONS NOT SATISIFIED IT IS AN
“ ACQUISITION” and not a “ MERGER”
Amalgamation in the nature of Acquisition
-Purchase- Conditions to be met
Assets and outside liabilities of transferor
company carried at their fair market values.
The difference between purchase
consideration and value is treated as “
Goodwill and amortized over 5 years. If the
difference is negative treat as “ Capital
Reserve”.
Due to higher write up of assets, leading to
higher depreciation and amortization of
goodwill, profits under this method are lower.
In this method Reserves and Profits of
transferor company are not merged in the
Balance Sheet.
Methods of accounting for mergers?
Pooling of interests Method:
– Assumes a merger among equals.
– New balance sheet is merely the sum of the
two existing balance sheets.
– No income statement effects other than
summing the two income statements. (P&L)
– Difference between share capital issued to
transferor company and the amount of share
capital of transferor company is adjusted to
General Reserves.
Purchase Method :
– The assets of the acquired firm are “written up” to
reflect purchase price if it is greater than the net asset
value.
– Goodwill is often created, which appears as an asset on
the balance sheet.
– Common equity account is increased to balance assets
and claims.
– Goodwill is amortized and expensed over time, thus
reducing future reported earnings.
– If any special Reserve is to be carried forward for more
years, create Amalgamation Adjustment Account( Dr.)
and maintain the Reserve.
– Balances in P & L account and General Reserves a/c will
no more exist as cash purchase consideration is made.
PROCEDURE FOR MERGERS:Appointment of the merchant banker –
Acquirer has to appoint category 1
merchant banker.
Public announcement of the offer1) Merchant Banker would make
announcement within 4 days from the
decision to acquire shares.
2) Public announcement in one English, one
Hindi and one regional language daily.
3) Notification should be sent to concerned
stock exchanges and to the target
company.
Submission of letter of offer to SEBI-The MB
should file with SEBI the draft of the letter of
offer with the fees of Rs. 50,000/-within 14
days from the date of public announcement.
Minimum Offer Price-It would be payable
a) In Cash and/or
b)By exchange of shares of the acquirer if it
is a listed co.
c) By exchange and/or transfer of secured
instruments with a minimum of ‘A ’grade
rating from the credit rating agencies.
d) A combination of all of three.
Minimum offer price - It should be
highest of
(a)Negotiated price
(b)Highest price paid by the acquirer during
the 26 weeks prior to the date of
announcement.
(c)price paid by acquirer under preferential
allotment.
(d)Average of the quoted weekly high and
low of the closing prices of the shares of
the target co. during 26 weeks preceding
the date of public announcement.
Minimum no. of shares to be acquired- It should
be made for minimum of 20% of the voting
capital.
General obligations of the acquirer
1. The acquirer should send the copy of the draft
letter to the target co.
2.To send the letter of offer to all the shareholders
of the target co.
3.To send the letter of offer to the custodians of
ADR/GDR holders.
4.The offer should remain open for the period of
maximum 30days.
5.During the offer period the acquirer should not
enter the board of directors of the target co.
6Acquirer should complete all the procedures
within 3o days from the date of closure.
General obligations of the target co.
1.During the offer period, the target co. should not sell,
transfer, and dispose off its assets in the ordinary
course of business of the co.
2.He should not issue any authorized but not issued
securities.
3.The target co. should furnish a list of shareholders,
warrant holders, convertible debenture holders to
the Acquirer.
4.After the announcement of public offer, the board of
director should not appoint any person as an
additional director.
5.Upon fulfillment of the obligations by the acquirer,
the board of directors would transfer the acquired
securities and give representation on the board or
control over the co.
SEBI substantial acquisition of shares and takeover code,
1997
Acquisition of shares / voting right- Acquirer holding 5% of
voting rights is required to disclose to the concerned Co.
Continual Disclosure- Persons holding more than 15 % have
to disclose their holdings within 21 days from the financial
year-end to the respective co.
Power to call information- Stock exchanges.Concerned co.
would have to furnish disclosures of shareholding.
Acquisition of 15 % or more shares-Acquirer has to make
public announcement at this stage.
Contents of the public announcement offer Existing paid up share capital of the target co.
 Total no. of shares proposed to be acquired from
public.
 Minimum offer price.
 Identity of the acquirer.
 Existing holdings of the acquirer in the target
company.
 The average and the highest price paid by the
acquirer for acquisitions.
 Objective and purpose of acquisition, future
plans

The date of opening and closure of the offer.
 Whether the offer is subject to minimum no of
shares from the shareholders.
 Mode of payment of consideration.
Competitive bid
Any person within the 21 days from the public
announcement
should
make
the
public
announcement of his offer for acquisition of the
shares of the same target co.
Such offer should be at least equal to the no. of
shares for which the first announcement has
been made.
The first acquirer would (a) Revise the offer (b)
Withdraw the offer.
Upward revision of offer- Irrespective of the
competitive bid it can be done any time up to 7
working days prior to the closing of the issue.
Withdrawal of offer1. As a consequence of competitive bid.
2.The statutory approval required has been refused
3.Sole acquirer has died.
DIVESTITURES
Mergers, Amalgamations, takeovers,
acquisitions- bring ‘synergy’- 3 + 2=6!!
Divestitures bring ‘Energy’- 5-3 =3 !!
Types of Divestitures:– Partial Sell-off- of Divisions
If Div. Proceeds > Value of ownership position(VOP)
If Div. Proceeds = VOP – decision may be indifferent
If Div. Proceeds < VOP – Retain holding.
Referred as “ Slump Sale” attracts Capital Gains.
DIVESTITURES
Types of divestitures (contd):Demergers:– Spin- off:- of a division into an independent
company( cash disbursed to shareholders of
existing co.)
– Split-up:- when company splits into one or
more companies
– Equity Carve-out:- Parent co. selling a portion
of its equity in a subsidiary to public for CASH.
Strategic investor may get inducted into the
subsidiary.
Ownership restructuring
Going Private:Private-Public Partnership
Leveraged Buy-out