Expansion Growth is always essential for the existence of a business concern.

n. A concern is bound to die if it does not try to expand its activities.

Reasons For Expansion Existence Advantages of large scale Use for higher profits Monopolistic ambitions Natural urge

Merger or amalgamation A merger is a combination of two or more companies into one company. It may be in the form of one or more companies being merged into an existing company or a new company may be formed to merge two or more existing companies. According to Section 2 (IA) of the income tax act, 1961, the term amalgamation means the merger of one or more companies with another company or merger of two or more companies to form one company in such a manner that:

1. All the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation. 2. All the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation. 3. Shareholders holding not less than nine-tenths in the value of the shares in the amalgamating company or companies immediately before the amalgamation become the shareholders of the amalgamated company by virtue of the amalgamation.

Two forms of mergers

Merger through absorption

Absorption

Merger through consolidation

A combination of two or more companies into an existing company is known as absorption. In a merger through absorption all the companies except one go into liquidation and lose their separate identities. Suppose, there are two companies A ltd and B ltd. Company B ltd is merged into A ltd. Leaving its assets and liabilities to the acquiring company A ltd.; and company B ltd is liquidated. For example, absorption of Tata Fertilisers Ltd (TFL) by Tata Chemicals Ltd (TCL). TCL, an acquiring company(a buyer), survived after merger while TFL, an acquired company (a seller), ceased to exist. TFL transferred its assets, liabilities and shares to TCL.

Merger through Consolidation A consolidation is a combination of two or more companies into a 'new company'. In this form of merger, all companies are legally dissolved and a new entity is created. Suppose there are two companies A ltd. And B ltd. And they merge together to form a new company called AB ltd or C ltd. For example, merger of Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian Software Company Ltd and Indian Reprographics Ltd into an entirely new company called HCL Ltd.

Acquisition and take over It is the act of acquiring control over the management of other companies.

Example- takeover of Reliance Communications Ltd. by Reliance Capital Ltd.

Take-over

Friendly

Hostile

Through mutual agreement

Unwilling acquisition

three major types of mergers Horizontal merger:- is a combination of two or more firms in the same area of business. For example, combining of two book publishers or two luggage manufacturing companies to gain dominant market share. Vertical merger:- is a combination of two or more firms involved in different stages of production or distribution of the same product. For example, joining of a TV manufacturing(assembling) company and a TV marketing company or joining of a spinning company and a weaving company. Vertical merger may take the form of 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. Conglomerate merger:- is a combination of firms engaged in unrelated lines of business activity. For example, merging of different businesses like manufacturing of cement products, fertilizer products, electronic products, insurance investment and advertising agencies. L&T and Voltas Ltd are examples of such mergers.

REASONS FOR MERGERS 1. ECONOMIES OF SCALE: an amalgamated company will have more resources at its command than he individual companies. This will help in increasing the scale of operations and the economies of large scale will be availed. These economies will occur because of more intensive utilization of production facilities, distribution network etc.

2. Operating economies: a number of operating economies will be available with the merger of two or more companies. Duplicating facilities in marketing, accounting, purchasing etc. will be eliminated. 3. Synergy: it refers to greater combined value of merged firms than the sum of the values of individual units. It is like one plus one is more than two. So when merger takes place, synergy can be availed. 4. Growth: A company may not grow rapidly through internal expansion. Merger or amalgamation enables satisfactory and balanced growth of a company. It can cross many stages of growth at one time through amalgamation. 5. Diversification: two or more companies operating in different lines can diversify their activities through merger. When a company tries to enter new lines of activities then it may face number of problems in production, marketing etc. when some concerns are already operating in different lines there will be less risk in diversification. 6. Utilization of tax shields: when a company with accumulated losses merges with a profit making company it is able to utilize tax shields. A company having losses will not be able to set off losses because it is not a profit earning firm. On the other hand if it merges with a concern earning profits then the accumulated losses of one unit will be set off against the future profits of the other firm. 7. Elimination of competition: the merger or amalgamation of two or more companies will eliminate competition among them. The companies will be able to save their advertising expenses thus enables them to reduce their prices. The consumers will also benefit in the form of cheap goods available to them. 8. Economic necessity: economic necessity may force the merger of some units. If there are two sick units, government may force their merger to improve their financial position and overall working. A sick unit may be required to merge with a healthy unit to ensure better utilization of resources, improved returns and better management. REGULATIONS 1. Analysis of proposal by the companies: whenever a proposal for amalgamation or merger comes up then managements of concerned companies look into the pros and cons of the scheme. The likely benefits such as economies of scale, operational economies, reduction in costs etc. are clearly evaluated. The likely reactions of shareholders, creditors and others are also assessed. After going through the whole analysis work, it is seen whether the scheme will be beneficial or not. It is pursued further only if it will benefit the interested parties otherwise the scheme is shelved. 2. Determining exchange ratios: the amalgamation or merger schemes involve exchange of shares. The shareholders of amalgamated companies are given shares of the amalgamating company. It is very important that the rational ratio of exchange of shares should be decided. 3. Approval of board of directors: after discussing the amalgamation scheme thoroughly and negotiating the exchange ratios, it is put before the respective board of directors for approval.

4. Approval of shareholders: after the approval of this scheme by the respective board of directors, it must be put before the shareholders. According to section 391 of the Indian Companies Act, the amalgamation scheme should be approved at the meeting of the members representing three-fourth in value and majority in number. 5. Consideration of interest of creditors: the views of the creditors should also be taken into consideration. According to section 391, amalgamation scheme should be approved by majority of creditors in numbers and three-fourth in value. 6. Approval of the court: after getting the scheme approved, an application is filed in the court for its sanction. The court may accept, modify or reject an amalgamation scheme and pass orders accordingly. However, it is upto the shareholders whether to accept the modified scheme or not. Consideration: 1. Cash offer: after the value of the firm to be acquired has been determined, the most straight forward method of making the payment could be by way of offer for cash payment. 2. Equity share financing or exchange of shares: under this method, shareholders of the acquired company are given shares of the acquiring company. The determination of a rational exchange ratio is the most important factor in this form of financing a merger. 3. Debt and preference share financing: a company may also finance a merger through issue of fixed interest bearing convertible debentures and convertible preference shares bearing a fixed rate of dividend. The shareholders of the acquired company sometimes prefer such a mode of payment because of security of income alongwith the option of conversion into equity within a stated period. 4. Tender offer: under this method, the purchaser who is interested in acquisition of some company, approaches the shareholders of the target firm directly and offers them a price to encourage them to sell their shares to him.

Regulation Of Combinations Section 3 of the act governs anti-competitive agreements and prohibits: "Agreements involving production, supply, distribution, storage, acquisition or control of goods or provision of services, which cause or are likely to cause an 'appreciable adverse effect on competition' in India." Section 4 of the act prohibits the abuse of a dominant position by an enterprise. There shall be an abuse of dominant position if an enterprise or a group (a) directly or indirectly, imposes unfair or discriminatory (i) condition in purchase or sale of goods or service; or

(ii) price in purchase or sale (including predatory price) of goods or service. (b) limits or restricts (i) production of goods or provision of services or market therefor; or (ii) technical or scientific development relating to goods or services to the prejudice of consumers; or (c) indulges in practice or practices resulting in denial of market access in any manner; or (d) makes conclusion of contracts subject to acceptance by other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts; or (e) uses its dominant position in one relevant market to enter into, or protect, other relevant market. Section 6 of the competition Act states that no person or enterprise will enter into Combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination will be void. A combina tion is either a merger of two enterprises or the acquisition of the control, shares, voting rights or assets of an enterprise or an enterprise that belongs to a group if it meets the jurisdictional requirements set forth below. Although the Act does not expressly so state, the term combination include horizontal, vertical and conglomerate mergers. Criteria under Section 5 Section 5 of the competition act defines combination by providing threshold limits on assets and turnovers. At present, any acquisition, merger or amalgamation falling within the ambit of the thresholds constitutes a combination. The following transactions will constitute a combination: (a) any acquisition where (i) the parties to the acquisition, being the acquirer and the enterprise, whose control, shares, voting rights or assets have been acquired or are being acquired jointly have, (A) either, in India, the assets of the value of more than rupees one thousand crores or turnover more than rupees three thousand crores; or (B) in India or outside India, in aggregate, the assets of the value of more than five hundred million US dollars, including at least rupees five hundred crores in India, or turnover more than fifteen hundred million US dollars, including at least rupees fifteen hundred crores in India; or (ii) the group, to which the enterprise whose control, shares, assets or voting rights have been acquired or are being acquired, would belong after the acquisition, jointly have or would jointly have, (A)either in India, the assets of the value of more than rupees four thousand crores or turnover more than rupees twelve thousand crores; or (B)in India or outside India, in aggregate, the assets of the value of more than two billion US dollars, including at least rupees five hundred crores in India, or turnover more than six billion US dollars, including at least rupees fifteen hundred crores in India; or (b) acquiring of control by a person over an enterprise when such person has already direct or indirect control over another enterprise engaged in production, distribution or trading of a similar or identical or substitutable goods or provision of a similar or identical or substitutable service, if (i) the enterprise over which control has been acquired along with the enterprise over which the acquirer already has direct or indirect control jointly have,

(A) either in India, the assets of the value of more than rupees one thousand crores or turnover more than rupees three thousand crores; or (B) in India or outside India, in aggregate, the assets of the value of more than five hundred million US dollars, including at least rupees five hundred crores in India, or turnover more than fifteen hundred million US dollars, including at least rupees fifteen hundred crores in India; or (ii) the group, to which enterprise whose control has been acquired, or is being acquired, would belong after the acquisition, jointly have or would jointly have, (A) either in India, the assets of the value of more than rupees four thousand crores or turnover more than rupees twelve thousand crores; or (B) in India or outside India, in aggregate, the assets of the value of more than two billion US dollars, including at least rupees five hundred crores in India, or turnover more than six billion US dollars, including at least rupees fifteen hundred crores in India; or (c) any merger or amalgamation in which (i) the enterprise remaining after merger or the enterprise created as a result of the amalgamation, as the case may be, have, (A) either in India, the assets of the value of more than rupees one thousand crores or turnover more than rupees three thousand crores; or (B) in India or outside India, in aggregate, the assets of the value of more than five hundred million US dollars, including at least rupees five hundred crores in India, or turnover more than fifteen hundred million US dollars, including at least rupees fifteen hundred crores in India; or (ii) the group, to which the enterprise remaining after the merger or the enterprise created as a result of the amalgamation, would belong after the merger or the amalgamation, as the case may be, have or would have, (A) either in India, the assets of the value of more than rupees four-thousand crores or turnover more than rupees twelve thousand crores; or (B)in India or outside India, in aggregate, the assets of the value of more than two billion US dollars, including at least rupees five hundred crores in India, or turnover more than six billion US dollars, including at least rupees fifteen hundred crores in India