CHAPTER 2

Merger & Acquisition

Types, Process
Reasons of Failure
Presented By:
Dr. Sangeeta
Assistant Professor
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Merger

“It involves combination of all the assets, liabilities,

loans, and businesses (on a going concern basis) of two
(or more) companies such that one of them survives.”

 Merger is primarily a strategy of

inorganic growth.

 Example:
India’s largest private sector
corporate entity Reliance
Industries Limited (RIL) is indeed
a result of many mega mergers
of group companies into RIL.
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Merger

A Limited B Limited
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Consolidation

B Limited
A Limited

C Limited

 It involves creation of an altogether new company owning assets,

liabilities, loans and businesses (on going concern basis) of two or
more companies, both/all of which cease to exist.
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Important Concepts
Amalgamation:
This term is used only in India. It is an umbrella term which includes both merger
and consolidation. In India, legal requirements for either merger or consolidation are
the same. They are stipulated in sections 390 to 394A and 396 and 396A of the
Companies Act, 1956.

Amalgamating company or transferor company:

In the process of merger or consolidation, the company whose assets and liabilities
are transferred to another company and which ceases to exist through the process
of dissolution without winding up is called amalgamating or transferor company.
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Important Concepts

Amalgamated company or transferee company

In the process of merger or consolidation, that company which receives the
assets and liabilities of other company or companies and continues to
survive/exist is called an amalgamated company or transferee company.
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Acquisition

 Absolute control

This would mean an unfettered right to take any decision.

However, in such a case, the company cannot become a listed

company or continue to be listed company if it was listed earlier.

The condition of minimum two members for a private company

or seven members for a public company will have to be
complied with.
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Acquisition

 Practically Absolute Control

• This can be defined as an ability to get any and all resolutions

passed in the general body meeting of the shareholders

• Most of the important decisions, such as further issue of

capital other than a rights issue, buy-back of shares, reduction
of capital, delisting of the company, etc., can be taken, only by
passing a special resolution.

• A special resolution can be passed if at least 75 per cent of the

shareholders by value votes in favour of a special resolution.
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Acquisition

 Acquisition of a target company through power of

attorney, etc.

This is not a commonly used way of effecting acquisition of a

company.

It could be used only as a short-term tactic, probably as a

precursor to the substantial acquisition of shares from existing
promoters or a faction of the existing promoters, who, pending
the conclusion of Memorandum of Understanding (MOU) to sell
their shares to the acquirer, may allow him to vote on their behalf
on certain key resolutions.
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Acquisition

 Some of the significant acquisitions in Indian context in

recent past :

Acquisition of Corus by Tata Steel

Acquisition of Novelis by Hindalco
Acquisition of Spice Communication by Idea Cellular
Acquisition of Ranbaxy by Daiichi Sankyo
Acquisition of Hutchison Essar by Vodafone
Acquisition of Sahara Airlines by Jet Airways
Acquisition of Deccan Airways by Kingfisher Airlines
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Types of M & A
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Reverse Merger

• A reverse takeover or reverse merger

takeover is the acquisition of a public
company by a private company so that the
private company can bypass the lengthy
and complex process of going public. The
transaction typically requires
reorganization of capitalization of the
acquiring company. 
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Examples

• Horizontal Mergers : 
* Lipton India & Brooke bond
Bank of Mathura with ICICI Bank
• BSES Ltd. with Orissa Power Supply co.
2.Vertical Merger : Reliance and FLAG Telecom
group
3. Reverse Mergers : * Godrej Soaps Ltd. with
Gujrat Godrej Innovative Chemicals Ltd.
4. Conglomerate merger : L&T and Voltas Ltd.
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#1 – Developing Strategy
The M&A process starts with the development of a
strategy which involves various aspects. The buyer
identifies the motivation behind the mergers and
acquisitions transaction process, the type of
transaction that they want to conduct, the amount of
capital they are willing to spend for this transaction
are some of the factors that the buyer considers
while developing the strategy
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#2 – Identifying and Contacting Targets
After the buyer has developed the M&A strategy, they
start identifying potential targets in the market that
fit their criteria. A list of all potential targets is made
and the buyer starts contacting the targets in order
to express interest in them.  The main purpose of this
step is to obtain more information about the targets
and measure their level of interest in such a
transaction.
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#3 – Information Exchange
After the initial conversation goes well and both the
parties have shown interest in going ahead with the
transaction, they begin the initial documentation which
generally includes submission of Letter of Intent to
officially express interest in the transaction and signing a
confidentiality document assuring that the proceedings
and discussions of the deal will not go out. After that, the
entities exchange information such as financials,
company history, etc so that both parties can better
assess the benefits of the deal to their respective
shareholders.
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#4 – Valuation and Synergies
After both the sides have more information of the
counterparty, they begin an assessment of the target and
of the deal as a whole. The seller is trying to determine
what would be a good price that would result in the
shareholders gaining from the deal. The seller is trying to
assess what would be a reasonable offer for the target.
The buyer is also trying to assess the extent
of synergies that they can gain from this transaction in
forms of cost reduction, increased market power, etc.
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#5 – Offer and Negotiation
After the buyer has completed their valuation and
assessment of the buyer, they submit an offer to the
shareholders of the target. This offer could be a cash
offer or a stock offer. The seller analyzes the offer and
negotiates for a better price if they feel that the offer is
not reasonable. This step can take a long time to be
completed because neither party wants to give the
upper hand to the other by showing their hurry to close
the deal. Another common hindrance at this step is that
sometimes when the target is a very attractive entity,
there could be more than one potential buyer. So often
there is a competition among the buyers to offer a better
price and terms to the target.
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• #6 – Due Diligence
• After the target has accepted the offer from the
buyer, the buyer begins due diligence of the target
entity. Due diligence consists of a thorough
review of every aspect of the target entity
including products, customer base, financial
books, human resources, etc. The objective is to
ensure that there are no discrepancies in the
information which was provided earlier to the
buyer and based on which the offer was made. If
some discrepancies come up, it could lead to a
revision of the bid to justify the actual information.
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• #7 – Purchase Agreement
• Assuming that everything has gone well,
including the government approvals and
no antitrust laws kicking in, both parties
begin drafting the final agreement which
outlines the cash/stock that would be
given to the target shareholders. It also
includes the time in which such a payment
would be made to the target shareholders.
•
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• #8 – Deal Closure and Integration
• After the purchase agreement has been finalized,
both parties close the deal by signing the
documents and the buyer gains control of the
target. Post the closure of the deal, the
management teams of both the entities work
together to integrate them into the merged entity.
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