MERGERS AND ACQUISITIONS: A tool to enhance stakeholders value

TABLE OF CONTENTS

1. Introduction
2. Mergers and Amalgamations
3. Acquisitions
4. Benefits of Mergers and Acquisitions
Impact of Mergers and Acquisitions on stake holders
5. Merger and Acquisition Strategies

6. Failure of Mergers And Acquisitions

7. Regulations for Mergers & Acquisitions

i. Companies act

ii. SEBI’s guidelines/ Exchange Control

8. Cases
9. Conclusion

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I. Introduction

The M&A activity in India’s corporate sector, domestic as well as trans-national, which
gained momentum in the second half of the 1990s, has waned somewhat in 2008. Favourable
government policies, buoyancy in economy, additional liquidity in the corporate sector, and
dynamic attitudes of the Indian entrepreneurs were the key factors behind the changing trends
of M&As in India. Acquisition of foreign companies by the Indian businesses has been the
latest trend in the Indian corporate sector.
With Indian corporate houses showing sustained growth over the last decade, many have
shown an interest in growing globally by choosing to acquire or merge with other companies
outside India. One such example would be the acquisition of Britain’s Corus by Tata an
Indian conglomerate by way of a leveraged buy-out. The Tatas also acquired Jaguar and Land
Rover in a significant cross border transaction. Whereas both transactions involved the
acquisition of assets in a foreign jurisdiction, both transactions were also governed by Indian
domestic law. Whether a merger or an acquisition is that of an Indian entity or it is an Indian
entity acquiring a foreign entity, such a transaction would be governed by Indian domestic
law. In the sections which follow, we touch up on different laws with a view to understand
broader areas of law which would be of significance. Mergers and acquisitions are methods
by which distinct businesses may combine. Joint ventures are another way for two businesses
to work together to achieve growth as partners in progress, though a joint venture is more of a
contractual arrangement between two or more businesses.

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 A. MERGERS AND AMALGAMATIONS.

The term ‘merger’ is not defined under the Companies Act, 1956 (the ‘Companies Act’), the
Income Tax Act, 1961 (the ‘ITA’) or any other Indian law. Simply put, a merger is a
combination of two or more distinct entities into one; the desired effect being not just the
accumulation of assets and liabilities of the distinct entities, but to achieve several other
benefits such as, economies of scale, acquisition of cutting edge technologies, obtaining
access into sectors / markets with established players etc. Generally, in a merger, the merging
entities would cease to be in existence and would merge into a single surviving entity. Very
often, the two expressions "merger" and "amalgamation" are used synonymously. But there
is, in fact, a difference. Merger generally refers to a circumstance in which the assets and
liabilities of a company (merging company) are vested in another company (the merged
company). The merging entity loses its identity and its shareholders become shareholders of
the merged company. On the other hand, an amalgamation is an arrangement, whereby the
assets and liabilities of two or more companies (amalgamating companies) become vested in
another company (the amalgamated company). The amalgamating companies all lose their
identity and emerge as the amalgamated company; though in certain transaction structures the
amalgamated company may or may not be one of the original companies. The shareholders of
the amalgamating companies become shareholders of the amalgamated company.

Mergers may be of several types, depending on the requirements of the merging entities:

Horizontal Mergers. Also referred to as a ‘horizontal integration’, this kind of merger takes
place between entities engaged in competing businesses which are at the same stage of the
industrial process. A horizontal merger takes a company a step closer towards monopoly by
eliminating a competitor and establishing a stronger presence in the market. The other
benefits of this form of merger are the advantages of economies of scale and economies of
scope.
Examples:
• The formation of Brook Bond Lipton India Ltd. through the merger of Lipton India
and Brook Bond

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 • The merger of Bank of Mathura with ICICI (Industrial Credit and Investment
Corporation of India) Bank
• The merger of ACC (erstwhile Associated Cement Companies Ltd.) with Damodar
Cement
• Exxon and Mobil
• Ford and Volvo
• Volkswagen and Rolls Royce and Lamborghini

Advantages of Horizontal Merger:

Horizontal merger provides the following advantages to the companies which are merged:
1) Economies of scope
The notion of economies of scope resembles that of economies of scale. Economies of scale
principally denote effectiveness related to alterations in the supply side, for example, growing
or reducing production scale of an individual form of commodity. On the other hand,
economies of scope denote effectiveness principally related to alterations in the demand side,
for example growing or reducing the range of marketing and supply of various forms of
products. Economies of scope are one of the principal causes for marketing plans like product
lining, product bundling, as well as family branding.

2) Economies of scale
Economies of scale refer to the cost benefits received by a company as the result of a
horizontal merger. The merged company is able to have bigger production volume in
comparison to the companies operating separately. Therefore, the merged company can
derive the benefits of economies of scale. The maximum use of plant facilities can be done by
the merged company, which will lead to a decrease in the average expenses of the production.
The important benefits of economies of scale are the following:
• Synergy
• Growth or expansion
• Risk diversification
• Diminution in tax liability
• Greater market capability and lesser competition

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 • Financial synergy (Improved creditworthiness, enhancement of borrowing power,
decrease in the cost of capital, growth of value per share and price earning ratio,
capital raising, smaller flotation expenses)

• Motivation for the managers for attaining economies of scale, there are two methods
o Increased fixed cost and static marginal cost
o No or small fixed cost and decreasing marginal cost
One example of economies of scale is that if a company increases its production twofold, then
the entire expense of inputs goes up less than twofold.
3) Dominant existence in a particular market

Vertical Mergers. Vertical mergers refer to the combination of two entities at different stages
of the industrial or production process. For example, the merger of a company engaged in the
construction business with a company engaged in production of brick or steel would lead to
vertical integration. Companies stand to gain on account of lower transaction costs and
synchronization of demand and supply. Moreover, vertical integration helps a company move
towards greater independence and self-sufficiency. The downside of a vertical merger
involves large investments in technology in order to compete effectively.
Examples:
• The Indian petrochemical giant Reliance Industries is a great example of vertical
integration in modern business. Reliance's backward integration from textiles into
polyester fibres and further into petrochemicals was started by Dhirubhai Ambani.
Reliance has entered the oil and natural gas sector, along with retail sector. Reliance
now has a complete vertical product portfolio from oil and gas production, refining,
petrochemicals, synthetic garments and retail outlets.

Congeneric Mergers. These are mergers between entities engaged in the same general
industry and somewhat interrelated, but having no common customer-supplier relationship. A
company uses this type of merger in order to use the resulting ability to use the same sales
and distribution channels to reach the customers of both businesses.
Examples:

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 • Citigroup's acquisition of Travelers Insurance. While both were in the financial
services industry, they had different product lines.

Conglomerate Mergers. A conglomerate merger is a merger between two entities in

unrelated industries. The principal reason for a conglomerate merger is utilization of financial
resources, enlargement of debt capacity, and increase in the value of outstanding shares by
increased leverage and earnings per share, and by lowering the average cost of capital. A
merger with a diverse business also helps the company to foray into varied businesses without
having to incur large start-up costs normally associated with a new business.
Examples:
• Procter & Gamble, a consumer goods company, engaged in just such a transaction
with its 2005 merger with Gillette.

Cash Merger. In a typical merger, the merged entity combines the assets of the two
companies and grants the shareholders of each original company shares in the new company
based on the relative valuations of the two original companies. However, in the case of a
‘cash merger’, also known as a ‘cash-out merger’, the shareholders of one entity receive cash
in place of shares in the merged entity. This is a common practice in cases where the
shareholders of one of the merging entities do not want to be a part of the merged entity.

Triangular Merger. A triangular merger is often resorted to for regulatory and tax reasons.
As the name suggests, it is a tripartite arrangement in which the target merges with a
subsidiary of the acquirer. Based on which entity is the survivor after such merger, a
triangular merger may be forward (when the target merges into the subsidiary and the
subsidiary survives), or reverse (when the subsidiary merges into the target and the target
survives).

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B. ACQUISITIONS.
An acquisition or takeover is the purchase by one company of controlling interest in the share
capital, or all or substantially all of the assets and/or liabilities, of another company. A
takeover may be friendly or hostile, depending on the offeror company’s approach, and may
be effected through agreements between the offeror and the majority shareholders, purchase
of shares from the open market, or by making an offer for acquisition of the offeree’s shares
to the entire body of shareholders.

Friendly takeover. Also commonly referred to as ‘negotiated takeover’, a friendly takeover

involves an acquisition of the target company through negotiations between the existing
promoters and prospective investors. This kind of takeover is resorted to further some
common objectives of both the parties.
Examples:
• Sterlite Industries Limited (“SIL”) – Indian Aluminum Company Limited (“Indal”).

Hostile Takeover. A hostile takeover can happen by way of any of the following actions: if
the board rejects the offer, but the bidder continues to pursue it or the bidder makes the offer
without informing the board beforehand.
Examples:
• Bombay Dyeing and Manufacturing Co Ltd -Bajoria
• LN Mittal group acquired management control of Arcelor against the wishes of the
Arcelor management.

Leveraged Buyouts. These are a form of takeovers where the acquisition is funded by
borrowed money. Often the assets of the target company are used as collateral for the loan.

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This is a common structure when acquirers wish to make large acquisitions without having to
commit too much capital, and hope to make the acquired business service the debt so raised.
Examples:
• Tata Corus deal

Bailout Takeovers. Another form of takeover is a ‘bail out takeover’ in which a profit
making company acquires a sick company. This kind of takeover is usually pursuant to a
scheme of reconstruction/rehabilitation with the approval of lender banks/financial
institutions. One of the primary motives for a profit making company to acquire a sick/loss
making company would be to set off of the losses of the sick company against the profits of
the acquirer, thereby reducing the tax payable by the acquirer. This would be true in the case
of a merger between such companies as well.
Acquisitions may be by way of acquisition of shares of the target, or acquisition of assets and
liabilities of the target. In the latter case it is usual for the business of the target to be acquired
by the acquirer on a going concern basis, i.e. without attributing specific values to each asset /
liability, but by arriving at a valuation for the business as a whole (in the context of the ITA,
such an acquisition is referred to as a ‘slump sale’ and discussed in greater detail in Part VI of
this paper). An acquirer may also acquire a target by other contractual means without the
acquisition of shares, such as agreements providing the acquirer with voting rights or board
rights. It is also possible for an acquirer to acquire a greater degree of control in the target
than what would be associated with the acquirer’s stake in the target, e.g., the acquirer may
hold 26% of the shares of the target but may enjoy disproportionate voting rights,
management rights or veto rights in the target.

C. JOINT VENTURES.
A joint venture is the coming together of two or more businesses for a specific purpose,
which may or may not be for a limited duration. The purpose of the joint venture may be for
the entry of the joint venture parties into a new business, or the entry into a new market,
which requires the specific skills, expertise, or the investment of each of the joint venture
parties. The execution of a joint venture agreement setting out the rights and obligations of
each of the parties is usually a norm for most joint ventures. The joint venture parties may
also incorporate a new company which will engage in the proposed business. In such a case,
the byelaws of the joint venture company would incorporate the agreement between the joint
venture parties.
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D. DEMERGERS.
A demerger is the opposite of a merger, involving the splitting up of one entity into two or
more entities. An entity which has more than one business, may decide to ‘hive off’ or ‘spin
off’ one of its businesses into a new entity. The shareholders of the original entity would
generally receive shares of the new entity.

Examples:
• Largest demerger in India was in the case of Reliance Industries wherein its 4
businesses where demerged into separate companies and the resulting companies were
listed on the stock exchanges.

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Benefits of Mergers and Acquisitions:

Benefits of Mergers and Acquisitions are manifold. Mergers and Acquisitions can generate
cost efficiency through economies of scale, can enhance the revenue through gain in market
share and can even generate tax gains.
The principal benefits from mergers and acquisitions can be listed as increased value
generation, increase in cost efficiency and increase in market share. Benefits of Mergers and
Acquisitions are the main reasons for which the companies enter into these deals. Mergers
and Acquisitions may generate tax gains, can increase revenue and can reduce the cost of
capital.

The main benefits of Mergers and Acquisitions are the following:

Greater Value Generation

Mergers and acquisitions often lead to an increased value generation for the company. It is
expected that the shareholder value of a firm after mergers or acquisitions would be greater
than the sum of the shareholder values of the parent companies. Mergers and acquisitions
generally succeed in generating cost efficiency through the implementation of economies of
scale.

Merger & Acquisition also leads to tax gains and can even lead to a revenue
enhancement through market share gain. Companies go for Mergers and Acquisition from
the idea that, the joint company will be able to generate more value than the separate firms.
When a company buys out another, it expects that the newly generated shareholder value will
be higher than the value of the sum of the shares of the two separate companies.

Mergers and Acquisitions can prove to be really beneficial to the companies when they are
weathering through the tough times. If the company which is suffering from various problems
in the market and is not able to overcome the difficulties, it can go for an acquisition deal. If a

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company, which has a strong market presence, buys out the weak firm, then a more
competitive and cost efficient company can be generated. Here, the target company benefits
as it gets out of the difficult situation and after being acquired by the large firm, the joint
company accumulates larger market share. This is because of these benefits that the small and
less powerful firms agree to be acquired by the large firms.

Gaining Cost Efficiency: When two companies come together by merger or acquisition, the
joint company benefits in terms of cost efficiency. A merger or acquisition is able to create
economies of scale which in turn generates cost efficiency. As the two firms form a new and
bigger company, the production is done on a much larger scale and when the output
production increases, there are strong chances that the cost of production per unit of output
gets reduced.

An increase in cost efficiency is affected through the procedure of mergers and acquisitions.
This is because mergers and acquisitions lead to economies of scale. This in turn promotes
cost efficiency. As the parent firms amalgamate to form a bigger new firm the scale of
operations of the new firm increases. As output production rises there are chances that the
cost per unit of production will come down

Mergers and Acquisitions are also beneficial

• When a firm wants to enter a new market

• When a firm wants to introduce new products through research and development
• When a forms wants achieve administrative benefits
• To increased market share
• To lower cost of operation and/or production
• To gain higher competitiveness
• For industry know how and positioning
• For Financial leveraging
• To improve profitability and EPS

An increase in market share is one of the plausible benefits of mergers and acquisitions. In
case a financially strong company acquires a relatively distressed one, the resultant
organization can experience a substantial increase in market share. The new firm is usually

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more cost-efficient and competitive as compared to its financially weak parent organization.

It can be noted that mergers and acquisitions prove to be useful in the following situations:
Firstly, when a business firm wishes to make its presence felt in a new market. Secondly,
when a business organization wants to avail some administrative benefits. Thirdly, when a
business firm is in the process of introduction of new products. New products are developed
by the R&D wing of a company.

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Impact of Mergers and Acquisitions

Just as mergers and acquisitions may be fruitful in some cases, the impact of mergers and
acquisitions on various sects of the company may differ. In the article below, details of how
the shareholders, employees and the management people are affected has been briefed.

Mergers and acquisitions are aimed at improving profits and productivity of a company.
Simultaneously, the objective is also to reduce expenses of the firm. However, mergers and
acquisitions are not always successful. At times, the main goal for which the process has
taken place loses focus. The success of mergers, acquisitions or takeovers is determined by a
number of factors. Those mergers and acquisitions, which are resisted not only affects the
entire work force in that organization but also harm the credibility of the company. In the
process, in addition to deviating from the actual aim, psychological impacts are also many.
Studies have suggested that mergers and acquisitions affect the senior executives, labor force
and the shareholders.

Employees:

• Impact Of Mergers and Acquisitions on workers or employees:

Aftermath of mergers and acquisitions impact the employees or the workers the most.
It is a well known fact that whenever there is a merger or an acquisition, there are
bound to be layoffs. In the event when a new resulting company is efficient business
wise, it would require less number of people to perform the same task. Under such
circumstances, the company would attempt to downsize the labor force. If the
employees who have been laid off possess sufficient skills, they may in fact benefit
from the lay off and move on for greener pastures. But it is usually seen that the
employees those who are laid off would not have played a significant role under the
new organizational set up. This accounts for their removal from the new organization
set up. These workers in turn would look for re employment and may have to be

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 satisfied with a much lesser pay package than the previous one. Even though this may
not lead to drastic unemployment levels, nevertheless, the workers will have to
compromise for the same. If not drastically, the mild undulations created in the local
economy cannot be ignored fully.

Management at the top:

• Impact of mergers and acquisitions on top level management:

Impact of mergers and acquisitions on top level management may actually involve a
"clash of the egos". There might be variations in the cultures of the two organizations.
Under the new set up the manager may be asked to implement such policies or
strategies, which may not be quite approved by him. When such a situation arises, the
main focus of the organization gets diverted and executives become busy either
settling matters among themselves or moving on. If however, the manager is well
equipped with a degree or has sufficient qualification, the migration to another
company may not be troublesome at all.

Shareholders:

Impact of mergers and acquisitions on shareholders:

We can further categorize the shareholders into two parts:

• The Shareholders of the acquiring firm

• The shareholders of the target firm.

Shareholders of the acquired firm: The shareholders of the acquired company benefit the
most. The reason being, it is seen in majority of the cases that the acquiring company usually
pays a little excess than it what should. Unless a man lives in a house he has recently bought,
he will not be able to know its drawbacks. So that the shareholders forgo their shares, the
company has to offer an amount more then the actual price, which is prevailing in the market.
Buying a company at a higher price can actually prove to be beneficial for the local economy.

Shareholders of the acquiring firm: They are most affected. If we measure the benefits
enjoyed by the shareholders of the acquired company in degrees, the degree to which they

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were benefited, by the same degree, these shareholders are harmed. This can be attributed to
debt load, which accompanies an acquisition.

Merger and Acquisition Strategies

A sound strategic planning can protect any merger from failure. The important issues that
should be kept in mind at the time of developing Merger and Acquisition Strategy, are
discussed in the following page.

Merger and Acquisition Strategies are extremely important in order to derive the maximum
benefit out of a merger or acquisition deal. It is quite difficult to decide on the strategies of
merger and acquisition, especially for those companies who are going to make a merger or
acquisition deal for the first time. In this case, they take lessons from the past mergers and
acquisitions that took place in the market between other companies and proved to be
successful.
Through market survey and market analysis of different mergers and acquisitions, it has been
found out that there are some golden rules which can be treated as the Strategies for
Successful Merger or Acquisition Deal.

• Before entering in to any merger or acquisition deal, the target company's market
performance and market position is required to be examined thoroughly so that the
optimal target company can be chosen and the deal can be finalized at a right price.
• Identification of future market opportunities, recent market trends and customer's
reaction to the company's products are also very important in order to assess the
growth potential of the company.
• After finalizing the merger or acquisition deal, the integration process of the
companies should be started in time. Before the closing of the deal, when the
negotiation process is on, from that time, the management of both the companies
require to work on a proper integration strategy. This is to ensure that no potential
problem crop up after the closing of the deal.

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 • If the company which intends to acquire the target firm plans restructuring of the
target company, then this plan should be declared and implemented within the the
period of acquisition to avoid uncertainties.
• It is also very important to consider the working environment and culture of the
workforce of the target company, at the time of drawing up Merger and Acquisition
Strategies, so that the labourers of the target company do not feel left out and become
demoralized.

Strategies

There are a variety of reasons why an acquiring company may wish to purchase another
company. Some takeovers are opportunistic - the target company may simply be very
reasonably priced for one reason or another and the acquiring company may decide that in the
long run, it will end up making money by purchasing the target company. The large holding
company Berkshire Hathaway has profited well over time by purchasing many companies
opportunistically in this manner.

Other takeovers are strategic in that they are thought to have secondary effects beyond the
simple effect of the profitability of the target company being added to the acquiring
company's profitability. For example, an acquiring company may decide to purchase a
company that is profitable and has good distribution capabilities in new areas which the
acquiring company can use for its own products as well. A target company might be attractive
because it allows the acquiring company to enter a new market without having to take on the
risk, time and expense of starting a new division. An acquiring company could decide to take
over a competitor not only because the competitor is profitable, but in order to eliminate
competition in its field and make it easier, in the long term, to raise prices. Also a takeover
could fulfill the belief that the combined company can be more profitable than the two
companies would be separately due to a reduction of redundant functions.

Takeovers may also benefit from principal-agent problems associated with top executive
compensation. For example, it is fairly easy for a top executive to reduce the price of his/her
company's stock - due to information asymmetry. The executive can accelerate accounting of
expected expenses, delay accounting of expected revenue, engage in off balance sheet
transactions to make the company's profitability appear temporarily poorer, or simply
promote and report severely conservative (eg. pessimistic) estimates of future earnings. Such

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seemingly adverse earnings news will be likely to (at least temporarily) reduce share price.
(This is again due to information asymmetries since it is more common for top executives to
do everything they can to window dress their company's earnings forecasts). There are
typically very few legal risks to being 'too conservative' in one's accounting and earnings
estimates.

A reduced share price makes a company an easier takeover target. When the company gets
bought out (or taken private) - at a dramatically lower price - the takeover artist gains a
windfall from the former top executive's actions to surreptitiously reduce share price. This
can represent 10s of billions of dollars (questionably) transferred from previous shareholders
to the takeover artist. The former top executive is then rewarded with a golden handshake for
presiding over the fire sale that can sometimes be in the 100s of millions of dollars for one or
two years of work. (This is nevertheless an excellent bargain for the takeover artist, who will
tend to benefit from developing a reputation of being very generous to parting top
executives). This is just one example of some of the principal-agent / perverse incentive
issues involved with takeovers.

Similar issues occur when a publicly held asset or non-profit organization undergoes
privatization. Top executives often reap tremendous monetary benefits when a government
owned or non-profit entity is sold to private hands. Just as in the example above, they can
facilitate this process by making the entity appear to be in financial crisis - this reduces the
sale price (to the profit of the purchaser), and makes non-profits and governments more likely
to sell. Ironically, it can also contribute to a public perception that private entities are more
efficiently run, reinforcing the political will to sell off public assets. Again, due to
asymmetric information, policy makers and the general public see a government owned firm
that was a financial 'disaster' - miraculously turned around by the private sector (and typically
resold) within a few years.

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Failure of Mergers and Acquisitions

Corporate mergers and acquisitions (M&As) have become popular from corner to corner the
world during the last two decades thanks to globalization, liberalization, technological
developments and intensely competitive business environment. The synergistic gains from
M&As may result from more efficient management, economies of scale, more profitable use
of assets, exploitation of market power, the use of complementary resources, etc.
Interestingly, the results of many empirical studies show that M&As fails to create value for
the shareholders of acquirers.

Studies reveal that approximately 40% to 80% of mergers and acquisitions prove to be
disappointing. The reason is that their value on the stock market deteriorates. The intentions
and motivations for effecting mergers and acquisitions must be evaluated for the process to be
a success. It is believed that when two companies merge the combined output will increase
the productivity of the merged companies. This is referred to as "economies of scale."
However, this increase in productivity does not always materialize.

There are several reasons merger or an acquisition failures. Some of the prominent causes are
summarized below:

• If a merger or acquisition is planned depending on the (bullish) conditions prevailing

in the stock market, it may be risky.
• There are times when a merger or an acquisition may be effected for the purpose of
"seeking glory," rather than viewing it as a corporate strategy to fulfill the needs of the
company. Regardless of the organizational goal, these top level executives are more
interested in satisfying their "executive ego."

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 • In addition to the above, failure may also occur if a merger takes place as a defensive
measure to neutralize the adverse effects of globalization and a dynamic corporate
environment.
• Failures may result if the two unifying companies embrace different "corporate
cultures."
• Mergers and acquisitions are almost a daily occurrence in the life sciences.
Competition is fierce, and companies must team up to survive in an industry where
specialized knowledge is king. One of the largest, most critical, and most difficult
parts of a business merger is the successful integration of the enterprise networks of
the merger partners. BPO Systems has the expertise and skills to make your merger
or acquisition a much smoother process.
• The prime objective of a firm is to grow profitably. The growth can be achieved either
through the process of introducing or developing new products or by expanding or enlarging
the capacity of existing products. Mergers and Acquisitions (M&As) are quite important
forms of external growth. The last decade of 20th century has been substantial increase in
both number and volume of M&A activity. In fact, consolidation through M&As has become
a major trend across the globe. This wave was driven by globalization, liberalization,
technological changes, and market deregulation and liberalization. Almost all industries are
going through reorganization and consolidation. M&A activity has been predominant in
sectors like steel, aluminum, cement, auto, banking and finance, computer software,
pharmaceuticals, consumer durables, food products, agro-chemicals, textiles, etc. Generally
M&As aims at achieving greater efficiency, diversification, market power, etc. The
synergistic gains by M&A activity accrue from more efficient management, economies of
scale and scope, improved production techniques, combination of complementary resources,
redeployment of assets to more profitable uses, the exploitation of market power or any
number of value enhancing mechanisms that fall under the rubric of corporate synergy.
M&As is a indispensable strategic tool for expanding product portfolios, entering new
markets, acquiring new technologies and building new generation organization with power
and resources to compete on a global basis.
• When M&As is taking place all over the world irrespective of the industry, it is
necessary to understand the basic concepts pertinent to this. The term merger involves
coming together of two or more concerns resulting in continuation of one of the existing
entities or forming of an entirely new entity. When one or more concerns merge with an
existing concern, it is the case of absorption. The merger of Global Trust Bank (GTB) with

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Oriental Bank of Commerce (OBC) is an example of absorption. After the merger, the
identity of the GTB is lost. But the OBC retains its identity. Amalgamation involves the
fusion of two or more companies and forming of a new company. The merger of Bank of
Punjab and Centurion Bank resulting in formation of Centurion Bank of Punjab is an example
of amalgamation. Acquisition is an act of acquiring effective control over the assets or
management of the corporate without any combination of both of them. When the acquisition
is 'forced' or 'unwilling', it is generally called takeover. Though, the terms 'merger',
'amalgamation', 'acquisition' and 'takeover' have specific meanings, they are generally used
interchangeably. Mergers may be horizontal, vertical or conglomerate. Further, they may be
friendly or hostile. Generally, mergers are friendly whereas tender offers are hostile. M&As
aim at optimum utilization of all available resources, exploitation of unutilized and under
utilized assets and resources including human resources, eliminating or limiting the
competition, achieving synergies, achieving economies of scale, forming a strong human
base, installing an integrated research platform, removing sickness, achieving savings in
administrative costs, reducing tax burden and ultimately improving the profits.

Reasons for Failure of Mergers and Acquisitions

• Though the M&As basically aim at enhancing the shareholders value or wealth, the
results of several empirical studies reveal that M&As consistently benefit the target
company's shareholders but not the acquirer company shareholders. A majority of corporate
mergers fail. Failure occurs on average, in every sense, acquiring firm stock prices likely to
reduce when mergers are announced; many acquired companies sold off; and profitability of
the acquired company is lower after the merger relative to comparable non-merged firms.
Consulting firms have also estimated that from one half to two thirds of M&As do not come
up to the expectations of those transacting them, and many resulted in divestitures. Statistics
show that roughly half of acquisitions are not successful. M&As fails quite often and fails to
create value or wealth for shareholders of the acquirers. A definite answer as to why mergers
fail to generate value for acquiring shareholders cannot be provided because mergers fail for a
host of reasons. Some of the important reasons for failures of mergers are discussed below:

1.Excessive premium

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In a competitive bidding situation, a company may tend to pay more. Often highest bidder is
one who overestimates value out of ignorance. Though he emerges as the winner, he happens
to be in a way the unfortunate winner. This is called winners curse hypothesis. When the
acquirer fails to achieve the synergies required compensating the price, the M&As fails. More
you pay for a company, the harder you will have to work to make it worthwhile for your
shareholders. When the price paid is too much, how well the deal may be executed, the deal
may not create value.

2. Size Issues

A mismatch in the size between acquirer and target has been found to lead to poor acquisition
performance. Many acquisitions fail either because of 'acquisition indigestion' through buying
too big targets or failed to give the smaller acquisitions the time and attention it required.

3. Lack of research

Acquisition requires gathering a lot of data and information and analyzing it. It requires
extensive research. A carelessly carried out research about the acquisition causes the
destruction of acquirer's wealth.

4. Diversification

Very few firms have the ability to successfully manage the diversified businesses. Unrelated
diversification has been associated with lower financial performance, lower capital
productivity and a higher degree of variance in performance for a variety of reasons including
a lack of industry or geographic knowledge, a lack of focus as well as perceived inability to
gain meaningful synergies. Unrelated acquisitions, which may appear to be very promising,
may turn out to be big disappointment in reality.

5. Previous Acquisition Experience

While previous acquisition experience is not necessarily a requirement for future acquisition
success, many unsuccessful acquirers usually have little previous acquisition experience.
Previous experience will help the acquirers to learn from the previous acquisition mistakes
and help them to make successful acquisitions in future. It may also help them by taking
advice in order to maximize chances of acquisition success. Those serial acquirers, who

21
possess the in house skills necessary to promote acquisition success as well trained and
competent implementation team, are more likely to make successful acquisitions.

6. Unwieldy and Inefficient

Conglomerate mergers proliferated in 1960s and 1970. Many conglomerates proved unwieldy
and inefficient and were wound up in 1980s and 1990s. The unmanageable conglomerates
contributed to the rise of various types of divestitures in the 1980s and 1990s.

7. Poor Cultural Fits

Cultural fit between an acquirer and a target is one of the most neglected areas of analysis
prior to the closing of a deal. However, cultural due diligence is every bit as important as
careful financial analysis. Without it, the chances are great that M&As will quickly amount to
misunderstanding, confusion and conflict. Cultural due diligence involve steps like
determining the importance of culture, assessing the culture of both target and acquirer. It is
useful to know the target management behavior with respect to dimensions such as
centralized versus decentralized decision making, speed in decision making, time horizon for
decisions, level of team work, management of conflict, risk orientation, openness to change,
etc. It is necessary to assess the cultural fit between the acquirer and target based on cultural
profile. Potential sources of clash must be managed. It is necessary to identify the impact of
cultural gap, and develop and execute strategies to use the information in the cultural profile
to assess the impact that the differences have.

8. Poor Organization Fit

Organizational fit is described as "the match between administrative practices, cultural

practices and personnel characteristics of the target and acquirer. It influences the ease with
which two organizations can be integrated during implementation. Mismatch of organation fit
leads to failure of mergers.

9. Poor Strategic Fit

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A Merger will yield the desired result only if there is strategic fit between the merging
companies. Mergers with strategic fit can improve profitability through reduction in
overheads, effective utilization of facilities, the ability to raise funds at a lower cost, and
deployment of surplus cash for expanding business with higher returns. But many a time lack
of strategic fit between two merging companies especially lack of synergies results in merger
failure. Strategic fit can also include the business philosophies of the two entities (return on
investment v/s market share), the time frame for achieving these goals (short-term v/s long
term) and the way in which assets are utilized. For example, P&G –Gillette merger in
consumer goods industry is a unique case of acquisition by an innovative company to expand
its product line by acquiring another innovative company, which was, described analysts as a
perfect merger.

10. Striving for Bigness

Size no doubt is an important element for success in business. Therefore there is a strong
tendency among managers whose compensation is significantly influenced by size to build
big empires. Size maximizing firms may engage in activities, which have negative net present
value. Therefore when evaluating an acquisition it is necessary to keep the attention focused
on how it will create value for shareholders and not on how it will increase the size of the
company.

11. Faulty evaluation

At times acquirers do not carry out the detailed diligence of the target company. They make a
wrong assessment of the benefits from the acquisition and land up paying a higher price.

12. Poorly Managed Integration

Integration of the companies requires a high quality management. Integration is very often
poorly managed with little planning and design. As a result implementation fails. The key
variable for success is managing the company better after the acquisition than it was managed
before. Even good deals fail if they are poorly managed after the merger.

13. Failure to Take Immediate Control

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Control of the new unit should be taken immediately after signing of the agreement. ITC did
so when they took over the BILT unit even though the consideration was to be paid in 5
yearly installments. ABB put new management in place on day one and reporting systems in
place by three weeks.

14. Failure to Set the Pace for Integration

The important task in the merger is to integrate the target with acquiring company in every
respect. All function such as marketing, commercial; finance, production, design and
personnel should be put in place. In addition to the prominent persons of acquiring company
the key persons from the acquired company should be retained and given sufficient
prominence opportunities in the combined organization. Delay in integration leads to delay in
product shipment, development and slow down in the company's road map. Acquisition of
Scientific Data Corporation by Xerox in 1969 and AT&T's acquisition of computer maker
NCR Corporation in 1991 were troubled deals, which resulted in large write offs. The speed
of integration is extremely important because uncertainty and ambiguity for longer periods
destabilizes the normal organizational life.

15. Incomplete and Inadequate Due Diligence

Lack of due diligence is lack of detailed analysis of all important features like finance,
management, capability, physical assets as well as intangible assets results in failure. ISPAT
Steel is a corporate acquirer that conducts M&A activities after elaborate due diligence.

16. Ego Clash

Ego clash between the top management and subsequently lack of coordination may lead to
collapse of company after merger. The problem is more prominent in cases of mergers
between equals.

17. Merger between Equals

Merger between two equals may not work. The Dunlop Pirelli merger in 1964, which created
the world's second largest tier company, ended in an expensive divorce. Manufacturing plants
can be integrated easily, human beings cannot. Merger of equals may also create ego clash.

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18. Over Leverage

Cash acquisitions results in the acquirer assuming too much debt. Future interest cost
consumes too great a portion of the acquired company's earnings (Business India 2005).

19. Incompatibility of Partners

Alliance between two strong companies is a safer bet than between two weak partners.
Frequently many strong companies actually seek small partners in order to gain control while
weak companies look for stronger companies to bail them out. But experience shows that the
weak link becomes a drag and causes friction between partners. A strong company taking
over a sick company in the hope of rehabilitation may itself end up in liquidation.

20. Limited Focus

If merging companies have entirely different products, markets systems and cultures, the
merger is doomed to failure. Added to that as core competencies are weakened and the focus
gets blurred the fallout on bourses can be dangerous. Purely financially motivated mergers
such as tax driven mergers on the advice of accountant can be hit by adverse business
consequences. The Tatas for example, sold their soaps business to Hindustan Lever.

21. Failure to Get Figures Audited

It would be serious mistake if the takeovers were concluded without a proper audit of
financial affairs of the target company. Though the company pays for the assets of the target
company, it also assumes responsibility to pay all the liabilities. Areas to look for are stocks,
salability of finished products, receivables and their collectibles, details and location of fixed
assets, unsecured loans, claims under litigation, loans from the promoters, etc. When ITC
took over the paperboard making unit of BILT near Coimbatore, it arranged for
comprehensive audit of financial affairs of the unit. Many a times the acquirer is mislead by
window-dressed accounts of the target.

22. Failure to Get an Objective Evaluation of the Target Company' Condition

Risk of failure will be minimized if there is a detailed evaluation of the target company's
business conditions carried out by the professionals in the line of business. Detailed

25
examination of the manufacturing facilities, product design features, rejection rates, and
distribution systems, profile of key people and productivity of the workers is done. Acquirer
should not be carried away by the state of the art physical facilities like a good head quarters
building, guest house on a beach, plenty of land for expansion, etc.

23. Failure of Top Management to Follow-Up

After signing the M&A agreement the top management should not sit back and let things
happen. First 100 days after the takeover determine the speed with which the process of
tackling the problems can be achieved. Top management follow-up is essential to go with a
clear road map of actions to be taken and set the pace for implementing once the control is
assumed.

24. Mergers between Lame Ducks

Merger between two weak companies does not succeed either. The example is the Stud
backer- Packard merger of 1955 when two ailing carmakers joined hands. By 1964 both
companies were closed down.

25. Lack of Proper Communication

Lack of proper communication after the announcement of M&As will create lot of
uncertainties. Apart from getting down to business quickly companies have to necessarily talk
to employees and constantly. Regardless of how well executives communicate during a
merger or an acquisition, uncertainty will never be completely eliminated. Failure to manage
communication results in inaccurate perceptions, lost trust in management, morale and
productivity problems, safety problems, poor customer service, and defection of key people
and customers. It may lead to the loss of the support of key stakeholders at a time when that
support is needed the most.

26. Failure of Leadership Role

Some of the role leadership should take seriously are modeling, quantifying strategic benefits
and building a case for M&A activity and articulating and establishing high standard for
value creation. Walking the talk also becomes very important during M&As.

26
27. Inadequate Attention to People Issues

Not giving sufficient attention to people issues during due diligence process may prove costly
later on. While lot of focus is placed on the financial and customer capital aspects, not enough
attention is given to aspects of human capital and cultural audit. Well conducted HR due
diligence can provide very accurate estimates and can be very critical to strategy formulation
and implementation.

28. Strategic Alliance as an Alternative Strategy

Another feature of 1990s is the growth in strategic alliances as a cheaper, less risky route to a
strategic goal than takeovers.

30. Loss of Identity

Merger should not result in loss of identity, which is a major strength for the acquiring
company. Jaguar's car image dropped drastically after its merger with British Leyland.

31. Diverging from Core Activity

In some cases it reduces buyer's efficiency by diverting it from its core activity and too much
time is spent on new activity neglecting the core activity.

32. Expecting Results too quickly

Immediate results can never be expected except those recorded in red ink. Whirlpool ran up a
loss $100 million in its Philips white goods purchase. R.P.Goenk's takeovers of Gramaphone
Company and Manu Chhabria's takeover of Gordon Woodroffe and Dunlops fall under this
category.

M&As have become very popular over the years especially during the last two decades owing
to rapid changes that have taken place in the business environment. Business firms now have
to face increased competition not only from firms within the country but also from
international business giants thanks to globalization, liberalization, technological changes,
etc. Generally the objective of M&As is wealth maximization of shareholders by seeking
gains in terms of synergy, economies of scale, better financial and marketing advantages,

27
diversification and reduced earnings volatility, improved inventory management, increase in
domestic market share and also to capture fast growing international markets abroad. But
astonishingly, though the number and value of M&As are growing rapidly, the results of the
studies on the impact of mergers on the performance from the acquirers' shareholders
perspective have been highly disappointing. In this paper an attempt has been made to draw
the results of only some of the earlier studies while analyzing the causes of failure of majority
of the mergers. Making the mergers work successfully is not that easy as here we are not only
just putting the two organizations together but also integrating people of two organizations
with different cultures, attitudes and mindsets. Meticulous pre-merger planning including
conducting proper due diligence, effective communication during the integration, committed
and competent leadership, speed with which the integration plan is integrated all this pave for
the success of M&As. While making the merger deals, it is necessary not only to make
analysis of the financial aspects of the acquiring firm but also the cultural and people issues
of both the concerns for proper post-acquisition integration.

Regulations for Mergers

Mergers and acquisitions are regulated under various laws in India. The objective of the laws
is to make these deals transparent and protect the interest of all shareholders. They are
regulated through the provisions of :-

1. The Companies Act, 1956

The Act lays down the legal procedures for mergers or acquisitions :-

• Permission for merger:- Two or more companies can amalgamate only when the
amalgamation is permitted under their memorandum of association. Also, the acquiring
company should have the permission in its object clause to carry on the business of the
acquired company. In the absence of these provisions in the memorandum of association, it is
necessary to seek the permission of the shareholders, board of directors and the Company
Law Board before affecting the merger.

• Information to the stock exchange:- The acquiring and the acquired companies should
inform the stock exchanges (where they are listed) about the merger.

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• Approval of board of directors:- The board of directors of the individual companies
should approve the draft proposal for amalgamation and authorise the managements of the
companies to further pursue the proposal.

• Application in the High Court:- An application for approving the draft amalgamation
proposal duly approved by the board of directors of the individual companies should be made
to the High Court.

• Shareholders' and creators' meetings:- The individual companies should hold separate
meetings of their shareholders and creditors for approving the amalgamation scheme. At
least, 75 percent of shareholders and creditors in separate meeting, voting in person or by
proxy, must accord their approval to the scheme.

• Sanction by the High Court:- After the approval of the shareholders and creditors, on
the petitions of the companies, the High Court will pass an order, sanctioning the
amalgamation scheme after it is satisfied that the scheme is fair and reasonable. The date of
the court's hearing will be published in two newspapers, and also, the regional director of the
Company Law Board will be intimated.

• Filing of the Court order:- After the Court order, its certified true copies will be filed
with the Registrar of Companies.

• Transfer of assets and liabilities:- The assets and liabilities of the acquired company
will be transferred to the acquiring company in accordance with the approved scheme, with
effect from the specified date.

• Payment by cash or securities:- As per the proposal, the acquiring company will
exchange shares and debentures and/or cash for the shares and debentures of the acquired
company. These securities will be listed on the stock exchange.

Regulations for acquisitions

The Companies Act does not make a reference to the term ‘acquisition’ per se. However, the
various modes used for making an acquisition of a company involve compliance with certain

29
key provisions of the Companies Act. The modes most commonly adopted are a share
acquisition or an asset purchase.

1. Acquisition of Shares A share purchase may take place by an acquisition of all existing
shares of the target by the acquirer, or by way of subscription to new shares in the target so as
to acquire a controlling stake in the target.

Under the Companies Act, companies have been classified into two main categories, namely:
(i) Private companies - which enjoy a more .relaxed regime. and
(ii) Public companies - which are subject to greater controls.

• The Companies Act was amended in December 2000 to include a private company which
is a subsidiary of a company which is not a private company, under the definition of a
public company.
• As a result even if a company has been duly incorporated as a private company, it will
lose its private company status if it were to become a subsidiary of a public company at
any subsequent point of time.
• Pursuant to the Companies Act, a private company is required to have provisions in its
charter documents restricting transfers of its shares and restricting invitations to the public
for accepting deposits.
• It is common to find blanket provisions in the charter documents of private companies
giving its board of directors the power to refuse any transfer of shares, if it deems fit, in
its sole discretion.
• Shares in a public company, on the other hand, are freely transferable. The board of
directors of a public company can reject transfers only on limited grounds of .sufficient
cause. which has often been interpreted by the Courts to mean failure to comply with
legal requirements
.
Share Transfer. The transferor and transferee are required to execute a share transfer form,
and lodge such form along with the share certificates, with the company. The share transfer
form is a prescribed form, which must be stamped in accordance with law. On lodging the
same with the company, the company will affect the transfer in its records and endorse the
share certificates in favor of the acquirer. It is also necessary for the Board of the company to
pass a resolution approving the transfer of shares.

Squeeze out provisions.

• Section 395 of the Companies Act provides that if a scheme or contract involving the
transfer of shares or a class of shares in a company (the ‘transferor company’) to another
company (the ‘transferee company’) is approved by the holders of at least 9/10ths in value
of the shares whose transfer is involved, the transferee company may give notice to the
dissenting shareholders that it desires to acquire such shares, and the transferee company
is then, not only entitled, but also bound to acquire such shares. In computing 90% (in
value) of the shareholders as mentioned above, shares held by the acquirer, nominees of
the acquirer and subsidiaries of the acquirer must be excluded.
• The scheme or contract referred to above should be approved by the shareholders of the
transferee company within 4 months from the date of the offer. The dissenting
shareholders have the right to make an application to the Court within one month from the
date of the notice, if they are aggrieved by the terms of the offer. If no application is
made, or the application is dismissed within one month of issue of the notice, the

30
 transferee company is entitled and bound to acquire the shares of the dissenting
shareholders.
• If the transferee already holds more than 10% (in value) of the shares (being of the same
class as those thatare being acquired) of the transferor, then the following conditions must
also be met:
1.) The transferee offers the same terms to all holders of the shares of that class whose
transfer is involved;
and
2.) The shareholders holding 90% (in value) who have approved the scheme/contract should
also be not less than 3/4ths in number of the holders of those shares (not including the
acquirer).
Therefore, if an acquirer already holds 50% of the shares of the target, it would need the
approval of 90% (in value) of the other shareholders of the target to invoke the provisions of
this Section, i.e. the approval of holders of 45% of the shares of the target.
• If this approval is received, the acquirer would then be entitled to acquire the balance 5%
of the shares of the target. Since the acquirer in such a case holds more than 10% of the
share capital, then the shareholders holding 45% of the share capital must also constitute
at least 3/4ths(in number) of the shareholders holding the balance 50%.
• Therefore, if one shareholder holds 45% and approves the transfer, and the remaining 5%
is held by 5 shareholders who do not approve the transfer, then the acquirer would not be
able to invoke the provisions of Section 395.
• If the dissenting shareholders do not apply to the Court, or the Court does not provide any
relief to the dissenting shareholders on their application, then the acquirer must send a
copy of the notice (issued to the dissenting shareholders) along with an instrument of
transfer, executed on behalf of the dissenting shareholder by any person appointed by the
acquirer, to the target along with the consideration payable.
• The instrument of transfer must also be executed by the transferee on its own behalf. The
transferor would then be obliged to record and register the transfer in favor of the
transferee. The consideration received by the transferor must be deposited in a separate
bank account and held in trust for the dissenting shareholders.
• This procedure is subject to the conditions and terms set forth in the Companies Act. The
merit of these provisions is that a complete takeover or squeeze-out could be effected
without resort to tedious court procedures.

RESTRICTIONS: Section 395 provides that the “transferor company” (i.e. the target)
can be any body corporate, whether or not incorporated under Indian law. Therefore
the target can also be a foreign company. However, a ‘transferee company’ (i.e. the
acquirer), must be an Indian company.

New share issuance. If the acquisition of a public company involves the issue of new shares
or securities to the acquirer, then it would be necessary for the shareholders of the company
to pass a special resolution under the provisions of Section 81(1A) of the Companies Act. A
special resolution is one that is passed by at least 3/4ths of the shareholders present and
voting at a meeting of the shareholders. A private company is not required to pass a special
resolution for the issue of shares, and a simple resolution of the board of directors should
suffice.
• The issue of shares by an unlisted public company to an acquirer must also comply with
the Unlisted Public Companies (Preferential Allotment) Rules, 2003. Some of the
important features of these rules are as follows:

31
1.)Equity shares, fully convertible debentures, partly convertible debentures or any other
financial instruments convertible into equity are governed by these rules.
2.) The issue of shares must be authorized by the articles of association of the company and
approved by a special resolution passed by shareholders in a general meeting, authorizing the
board of directors of the company to issue the shares. The validity of the shareholders’
resolution is 12 months, implying that if shares are not issued within 12 months of the
resolution, the resolution will lapse, and a fresh resolution will be required for the issuance.
3.) The explanatory statement to the notice for the general meeting should contain key
disclosures pertaining to the object of the issue, pricing of shares including the relevant date
for calculation of the price, shareholding pattern, change of control, if any, and whether the
promoters/directors/key management persons propose to acquire shares as part of such
issuance.

Investment Limits Section 372A of the Companies Act provides for certain limits on inter-
corporate loans and investments. An acquirer may acquire by way of subscription, purchase
or otherwise, the securities of any other body corporate up to 60% of the acquirers paid up
share capital and free reserves, or 100 % of its free reserves, whichever is more. However, the
acquirer is permitted to acquire shares beyond such limits, if it is authorized by its
shareholders vide a special resolution passed in a general meeting. It may be noted that the
restrictions under Section 372A are not applicable to private companies. Further, Section
372A would not be applicable to an acquirer which is a foreign company.

2. Asset Purchase
 . An asset purchase involves the sale of the whole or part of the assets of the target to the
acquirer. The board of directors of a public company or a private company which is a
subsidiary of a public company, cannot sell, lease or dispose all, substantially all, or any
undertaking of the company without the approval of the shareholders in a shareholders
meeting.
 Therefore, it would be necessary for more than 50% of the shareholders of the seller
company to pass a resolution approving such a sale or disposal. Further, a separate asset
purchase agreement may sometimes be executed to better capture the provisions relating
to transfer of assets. Non – compete provisions may also be linked to goodwill and
contained in the asset purchase agreement. Acquisitions of intangible property such as
copyrights, patents and trademarks are governed by the specific statutes dealing with
these intellectual property rights.

2. The Competition Act, 2002

The Act regulates the various forms of business combinations through Competition
Commission of India. Under the Act, no person or enterprise shall enter into a combination,
in the form of an acquisition, merger or amalgamation, which causes or is likely to cause an
appreciable adverse effect on competition in the relevant market and such a combination shall
be void. Enterprises intending to enter into a combination may give notice to the
Commission, but this notification is voluntary. But, all combinations do not call for scrutiny

32
unless the resulting combination exceeds the threshold limits in terms of assets or turnover as
specified by the Competition Commission of India. The Commission while regulating a
'combination' shall consider the following factors :-

• Actual and potential competition through imports;

• Extent of entry barriers into the market;

• Level of combination in the market;

• Degree of countervailing power in the market;

• Possibility of the combination to significantly and substantially increase prices or

profits;

• Extent of effective competition likely to sustain in a market;

• Availability of substitutes before and after the combination;

• Market share of the parties to the combination individually and as a combination;

• Possibility of the combination to remove the vigorous and effective competitor or

competition in the market;

• Nature and extent of vertical integration in the market;

• Nature and extent of innovation;

• Whether the benefits of the combinations outweigh the adverse impact of the
combination.

Thus, the Competition Act does not seek to eliminate combinations and only aims to
eliminate their harmful effects.

3. Stock market regulations

Stock Markets usually react in a very bizarre way to an M&A deal depending on a number of
factors. Some of the factors that directly affect the stock markets are:

• Size of the Transaction: A small transaction will not affect the market as much as a
large deal would

33
 • Market Mood: In a falling market, a higher number of transactions will lead to a
further fall and vice-versa
• Shareholder Value: The market usually reacts depending on whether a certain
transaction will create value for its shareholders

Regulations to Control Irregular Movements in the Market

Stringent market regulations seek to control extreme market movements which may
otherwise destabilize the market. In India, all such transactions are regulated and governed by
the Stock Exchange Board (SEBI). The board has framed stringent regulations in order to
protect interests of all parties concerned including shareholder interests. Regulations 10, 11
and 12 of the SEBI code deal with takeovers and take care to regulate them in a manner
which least effects the stock markets. Regulation 25 deals with the nuances of competitive
bidding, since this type of bidding usually throws markets into turmoil. This clause sets up
stringent conditions in those transactions where competitive bidding occurs.

In addition, SEBI ensures that all deals have to be publicly announced within 4 days on
entering into agreement or on a decision to acquire voting rights, whichever may be the case.
All shareholders must also be sent a letter of offer within 45 days from the date of the public
announcement, as a shareholder protection measure.

Cases:The information mentioned above was largely theoretical and legal. Let us examine
these aspects from a practical viewpoint by examining two real M&A deals in the
pharmaceutical industry and how they affected the stock movements. We’ll only consider
those deals that have been closed as of this date.

Case 1: Matrix Labs and Strides Arcolabs

MATRIX LABS

Matrix Labs Limited is a Hyderabad based company manufacturing Active Pharmaceutical

Ingredients (API) and Solid Oral Dosage Forms. They are also involved in contract R&D and
contract manufacturing. The company has manufacturing facilities in Nashik and Mumbai.

STRIDES ARCOLABS

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Strides Arcolabs is based in Bangalore and is involved in manufacture and export of branded
and generic dosage forms. The company is also involved in Contract R&D as well as contract
manufacturing. Strides have a global presence in six countries.

From the point of view of Strides Arcolabs, it was a merger of the two parties and not a
takeover. When the intention to merge the two entities was announced the individual stocks
along with the market registered an upward swing. Around mid year of 2005, the individual
managements of both companies decided to call off the merger due to internal issues. This led
to a huge fall in the prices of the individual stocks and a dip in the market for that particular
day. The stocks finally stabilized in about 3 months, while the market corrected itself in about
1-2 days.

This is an excellent example of market behavior when a certain deal is called off or when it
fails. The market will slide almost immediately.

Case 2: Matrix Labs and Mylan Laboratories

MATRIX LABS

Matrix Labs Limited is a Hyderabad based company manufacturing Active Pharmaceutical

Ingredients and Solid Oral Dosage Forms. The company is also involved in Contract R&D as
well as Contract Manufacturing. Matrix Labs has manufacturing facilities in Nashik and
Mumbai

MYLAN LABORATORIES

Mylan Labs is based near Pittsburgh. The company manufactures, develops and markets
generic drugs and claims of having a deep pipeline of researched drugs. Mylan Labs has a
strong base in the US and over the next five years the company plans to consolidate its
position in the North American market.

Matrix Labs was a target in this case. On the announcement of a possible takeover of the
company, the individual stock of Matrix Labs slumped by as much as Rs. 30 per share. This
also dragged down the pharma index which in turn dragged down the stock market. This
slump was seen largely due to market concerns that the company was being grossly
undervalued since the share price at the time discounted earnings estimates by 13 times (13x)

35
in comparison to peer companies. However, when Mylan announced that it was planning to
pay a premium on the stock, the market bounced back to normal and the share price of Matrix
Labs also stabilized.

In these transactions, every single action of all parties involved can have cascading or elating
effects on the markets depending on whether the action is negative or positive respectively.
Any M&A activities, especially between large entities have strong market implications.

Generally speaking the target to be acquired undergoes a price increase if its valuation is done
at a premium or sees a price drop if a premium is not being considered and the valuation is
undervalued. Similarly, the acquirer will see a price drop if a premium is being considered on
the target and vice-versa depending on the type of funding (debt or equity type) chosen to
fund the acquisition. If equity-type funding is used, the acquirer sees a short term drop in the
price of its own stock, which may not necessarily be the case otherwise when debt is raised
instead of equity.

The stock market also tends to make an evaluation of the synergies that exist between the two
organizations. Very often it is observed that cases where the mergers make perfect sense are
welcomed by the market and in cases where synergies are poor.

Conclusion:The Indian markets in general are highly regulated. Due to this, huge fluctuations
in the due to M&A activity are not seen. The regulations are designed in a manner so as to
mitigate the impact of these transactions on the market.

The amount of the company’s own equity used in funding an acquisition will almost always
impact the stock market in the short term. A premium valuation of the target will always lead
to a short term decrease in the stock value of the acquirer. The converse also stands true.

Finally, the most important factor is shareholder value that the transaction will create. In
transactions where a huge defensible shareholder value is created, the market will tend to
boom upward, whereas in the reverse scenario the market will tend to fall heavily.

Source – Chillibreeze.com

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New takeover code

The Takeover Regulations Advisory Committee—an advisory body set up by the Securities
and Exchange Board of India (Sebi) to overhaul the Takeover Code—on 19 July 2010, came
up with a number of striking recommendations. Increasing M&A activity, rapid
sophistication in the takeover market and the need to unify the code with global standards
were some of the factors that prompted it to fast-track the recommendations.

37
The committee suggested that the threshold to trigger an open offer be increased from 15 per
cent to 25 per cent. Secondly, the size of such an open offer should be hiked from 20 per cent
to 100 per cent, thereby ensuring parity and equal opportunity to large and small
shareholders. Further, it recommended that the acquirer may state upfront his intention to
delist if his holding in the target company were to cross the delisting threshold pursuant to the
open offer. To minimise speculative interest, the overall timeline for an open offer has been
brought down from 95 calender days to 57 business days. The pricing of the offer has also
undergone a lot of rationalisation, reducing the scope for arbitrage. Provisions relating to
creeping acquisition, indirect acquisition and voluntary open offer have also undergone
changes. So, how are they going to affect promoters of a company, its investors and the world
of M&A?

Promoters. With the limit for an open offer trigger going up from 15 to 20 per cent, it gives
promoters a good opportunity to hike their stakes without initiating an open offer. Also, the
relaxation on the delisting code may also trigger MNCs to take to the automatic delisting
route. Mukund Ranganathan, senior vice-president, Investment Advisory, Edelweiss Capital,
a leading financial services company, however, points out a few disadvantages the new code
could have for promoters. He says: “Promoters would end up being losers since they forego
non-compete fees. Second, they don’t get compensated for the risk of indemnifying the
company or assisting in management transition. The control premium on a per share basis
that they will get will also shrink, because the offer is for all the shareholders.”

That apart£, promoters with little shareholding control over their company could come under
a constant threat of a hostile takeover. “Voluntary offers in hostile situations are something
that should have been protected,” he insists.

Shareholders. It’s the minority shareholders who largely benefit from these recommendations
since they would be treated at a par with the large shareholders. So, they get an equal
opportunity to participate in an open offer for delisting. The time limit for an open offer has
been shrunk and rationalisation also sets in while pricing the offer, reducing the possibility of
arbitrage that now exists in open offers. To ensure investor protection, the code has also
introduced certain changes in corporate governance. Foreign and domestic institutional
investors who have noticeable stakes in listed companies could take this chance to hike their
shareholding by resorting to creeping acquisitions. Doing so would give them a foothold in
matters where shareholder’s approval would be crucial.

38
Acquirers. The new code simplifies the acquisition process, but it could severely impact the
cost of acquisition. “The banking sector is prohibited from lending money against purchase of
shares. So, funding will be a huge challenge for Indian promoters,” says Vivek Mehra,
executive director, tax & regulatory services, PricewaterhouseCoopers India, an audit and
advisory services firm.

Impact on M&A. “The proposed amendments would bring in only the serious players as the
cost of acquiring target companies would substantially increase,” says Manishi Pathak, senior
partner, corporate & regulatory affairs, head of South East Asia Practice, Kochhar &
Company, a Delhi-based law firm. Yet Mehra sees the new takeover code as a step in the
right direction. “It will increase overall activities in the M&A field if the there is a balancing
of minority squeeze-out and Indian promoters are at a level playing field as far as funding is
concerned,” he says. But Ranganathan says the proposal could affect near-term M&A deals.
“As financing requirement would go up and appetite of the selling promoters come down
(because of the benefits they are losing), we could see a near-term drop particularly in the
domestic-domestic M&As,” he says.

Source – Outlook Money India

INBOUND CROSS BORDER M&A IN INDIA AND THE FEMA LAWS

When we talk about inbound cross border M&As in India, we essentially mean foreign
investment in India. As stated earlier, foreign investment in India, i.e. investment in India by
a “person resident outside India”, also can be termed as “non-resident” is governed by FEMA
20.

Under FEMA 20, general permission has been granted to any non-resident to purchase shares
or convertible debentures of an Indian company under Foreign Direct Investment Scheme,
subject to the terms and conditions specified in Schedule 1. However citizens of Bangladesh,
Pakistan or Sri Lanka resident outside India and entities in Bangladesh or Pakistan are not

39
permitted to purchase shares or debentures issued by Indian companies or any other Indian
security without the prior approval of the RBI.

Further, persons resident outside India are permitted to purchase shares or convertible
debentures offered on a rights basis by an Indian company which satisfies the conditions
restated here in below:

(i) The offer on right basis does not result in increase in the percentage of foreign equity
already approved, or permissible under the Foreign Direct Investment Scheme in terms of
FEMA 20;

(ii) The existing shares or debentures against which shares or debentures are issued by the
company on right basis were acquired and are held by the person resident outside India in
accordance with FEMA 20;

(iii) The offer on right basis to the persons resident outside India is at a price which is not
lower than that at which the offer is made to resident shareholders;

The rights shares so acquired shall be subject to the same conditions regarding repatriation as
applicable to original shares. Further, under FEMA 20, an Indian company has been
permitted to issue shares to its employees or employees of its joint venture / subsidiary
abroad, who are non-resident, either directly or through a trust.

Under Regulation 7 of FEMA 20, once a scheme of merger, demerger or amalgamation has
been approved by the court, the transferee company (whether the survivor or a new company)
is permitted to issue shares to the shareholders of the transferor company who are persons
resident outside India, subject to the condition that the percentage of non resident holdings in
the company does not exceed the limits for which approval has been granted by the RBI or
the prescribed sectoral ceiling under the foreign direct investment policy set under the FEMA
laws. If the new share allotment exceeds such limits, the company will have to obtain the
prior approval of the FIPB and the RBI before issuing shares to the non residents.

General permission has also been granted for transfer of shares / convertible debentures by a
non-resident as follows:

(i) Non-residents other than non-resident Indians (“NRIs”) or Overseas Corporate

Bodies (“OCBs”)[14] may transfer shares / convertible debentures to any non-resident,
provided that the transferee should have obtained permission of the Central Government, if he

40
had any previous venture or tie-up in India through investment in any manner or a technical
collaboration or trademark agreement in the same or allied field in which the Indian company
whose shares are being transferred is engaged;

(ii) NRIs or OCBs are permitted to transfer by way of sale, any shares or convertible
debentures of Indian companies to other NRIs or OCBs only;

(iv) Non-residents are permitted to transfer shares / debentures of any Indian company to a
resident by way of gift.

FEMA 20 further stipulates that any transfer of security by a resident to a non-resident would
require the prior approval of the RBI. For the transfer of existing shares/convertible
debentures of an Indian company by a resident to a non resident by way of sale, the transferor
will have to obtain the approval of the Central Government before applying to the RBI. In
such cases, the RBI may permit the transfer subject to such terms and conditions, including
the price at which the sale may be made.

For the purpose of FEMA 20, investment in India by a non-resident has been divided into the
following 5 categories and the regulations applicable have been specified in respective
schedules as under:

(i) Investment under the Foreign Direct Investment Scheme (“the FDI Scheme”).

(ii) Investment by Foreign Institutional Investors (“FIIs”) under the Portfolio Investment
Scheme (“the Portfolio Investment Scheme”).

(iii) Investment by NRIs/OCBs under the Portfolio Investment Scheme.

(iv) Purchase and sale of shares by NRIs/OCBs on non-repatriation basis.
(iv) Purchase and sale of securities other than shares or convertible debentures of an
Indian company by non-residents.

FDI Scheme
Under the FDI Scheme, a non resident or a foreign entity, whether incorporated or not, may
purchase shares or convertible debentures of an Indian company. Any Indian company which
is not engaged in the activity or manufacture of items listed in Annexure A to the FDI
Scheme has been permitted to issue shares to a non resident up to the extent specified in
Annexure B to the FDI Scheme, on a repatriation basis, provided that:

41
(i) The issuer company does not require an industrial licence;
(ii) The shares are not being issued for acquiring existing shares of another Indian
company;
(iii) If the non-resident to whom the shares are being issued proposes to be a collaborator,
he should have obtained the Central Government’s approval if he had any previous
investment/collaboration/tie-up in India in the same or allied field in which the Indian
company issuing the shares is engaged.

FII Scheme
Further, a trading company incorporated in India may issue shares or convertible debentures
to the extent of 51% of its capital, to persons resident outside India subject to the condition
that remittance of dividend to the shareholders outside India is made only after the company
has secured registration as an export/trading/star trading /super trading house from the
Directorate General of Foreign Trade, Ministry of Commerce, Government of India, New
Delhi.

It also prescribes a ceiling of 10% of the total paid-up equity capital or 10% of the paid-up
value of each series of convertible debentures, and provides that the total holdings of all
FIIs/sub-accounts of FIIs put together shall not exceed 24% of paid-up equity capital or paid
up value of each series of convertible debentures. A registered FII is also permitted to
purchase shares/convertible debentures of an Indian company through private
placement/arrangement, subject to the prescribed ceilings.

RBI may also permit a domestic asset management company or a portfolio manager
registered with SEBI as FIIs for managing the sub-account to make investment under the
Portfolio Investment Scheme on behalf of non-residents who are foreign citizens and bodies
corporate registered outside India, provided such investment is made out of funds raised or
collected or brought from outside India through normal banking channel. Such investment is
restricted to 5% of the equity capital or 5% of the paid-up value of each series of convertible
debentures within the overall ceiling of 24% or 40% as applicable for FIIs for the purpose of
the Portfolio Investment Scheme.

42
 The designated branch of an authorised dealer is authorised to allow remittance of net sale
proceeds (after payment of taxes) or to credit the net amount of sale proceeds of shares /
convertible debentures to the foreign currency account or a non-resident rupee account of the
registered FII concerned.

Investment by NRIs/OCBs under the Portfolio Scheme

Under Schedule 3, a NRI/OCB is permitted to purchase/sell shares and/or convertible
debentures of an Indian company, through a registered broker on a recognised stock
exchange, subject to the following conditions:
(i) The NRI/OCB designates a branch of an authorised dealer for routing his/its
transactions relating to purchase and sale of shares/ convertible debentures under the Portfolio
Investment Scheme, and routes all such transactions only through the branch so designated;
(ii) The paid-up value of shares of an Indian company, purchased by each NRI/OCB both
on repatriation and on non-repatriation basis, does not exceed 5% of the paid-up value of
shares issued by the company concerned;
(iii) The paid-up value of each series of convertible debentures purchased by each
NRI/OCB both on repatriation and non-repatriation basis does not exceed 5% of the paid-up
value of each series of convertible debentures issued by the company concerned;
(iv) The aggregate paid-up value of shares of any company purchased by all NRIs and OCBs does
not exceed 10% of the paid up capital of the company and in the case of purchase of
convertible debentures the aggregate paid-up value of each series of debentures purchased by
all NRIs and OCBs does not exceed 10% of the paid-up value of each series of convertible
debentures[25];
(iv) The NRI/OCB takes delivery of the shares purchased and gives delivery of shares
sold;
(v) Payment for purchase of shares and/or debentures is made by inward remittance in
foreign exchange through normal banking channels or out of funds held in NRE/FCNR
account maintained in India if the shares are purchased on repatriation basis and by inward
remittance or out of funds held in NRE/FCNR/NRO/NRNR/NRSR account of the NRI/OCB
concerned maintained in India where the shares/debentures are purchased on non-repatriation
basis;
(vi) The OCB informs the designated branch of the authorised dealer immediately on the
holding/interest of NRIs in the OCB becoming less than 60%.

43
Paragraph 2 of Schedule 3 further provides that the link office of the designated branch of an
authorised dealer is obliged to furnish daily report to the Chief General Manager, Reserve
Bank of India (ECD) detailing the name of the NRI/OCB and the company wise number of
shares and/or debentures and paid-up value thereof, purchased and/or sold by each NRI
/OCB.

REGULATION OF OUTBOUND CROSS BORDER M&A TRANSACTIONS UNDER

FEMA LAWS

Outbound cross border M&A involving an Indian company i.e. foreign investment by an
Indian company in a foreign company is governed by FEMA and FEMA 19. There are only
certain special circumstances under which an Indian company is permitted to make an
investment in a foreign company. An Indian party is not permitted to make any direct
investment in a foreign entity engaged in real estate business or banking business without the
prior approval of RBI.

There are several routes available to an Indian company which intends to invest in a foreign
company, some of which are described herein below:

• Direct Investment in a Joint Venture/Wholly Owned Subsidiary

RBI has been continuously relaxing the provisions relating to direct investment in a joint
venture or a wholly owned subsidiary. Owing to these relaxations the percentage of
investment by Indian companies in joint ventures and wholly owned subsidiaries abroad has
been continuously rising.

General conditions to be fulfilled for making an investment

An Indian company is permitted to make a direct investment in a joint venture or a wholly
owned subsidiary outside India, without seeking the prior approval of RBI subject to the
following conditions being fulfilled:
(i) The total financial commitment of the Indian party will be capped at USD 50 Million
or its equivalent in a block of 3 financial years including the year in which the investment is
made, except investment in a Joint Venture/Wholly Owned Subsidiary in Nepal and Bhutan.

44
(ii) In respect of direct investment in Nepal or Bhutan, in Indian rupees the total financial
commitment shall not exceed Indian Rupees 1,200 Million in a block of 3 financial years
including the year in which the investment is made;
(iii) The direct investment is made in a foreign entity engaged in the same core activity
carried on by the Indian company;
(iv) The Indian company is not on the RBI’s caution list or under investigation by the
Enforcement Directorate.
(v) The Indian company routes all the transactions relating to the investment in the joint
venture or the wholly owned subsidiary through only one branch of an authorized dealer to be
designated by it. However the Indian company is permitted to designate different branches of
authorized dealer for onward transmission to the RBI.
(vi) The Indian company files the prescribed Form ODA to the designated branch of the
authorised dealer for onward transmission to the RBI.

Sources for investment

The Regulations also prescribe that any direct investment (as discussed above) must be made
only from the following sources like EFFC account, Drawal of foreign exchange and
ADR/GDR proceeds etc.
An Indian Party is also eligible to extend a loan or a guarantee to or on behalf of the Joint
Venture/ Wholly Owned Subsidiary abroad, within the permissible financial commitment, if
the Indian Party has made investment by way of contribution to the equity capital of the Joint
Venture.
Under Regulation 10, RBI is required to allot a unique identification number for each Joint
Venture/Wholly Owned Subsidiary outside India and the Indian party is in turn required to
quote such number in all its communications and reports to the Reserve Bank and the
authorised dealer.

• Investment in a foreign company by ADR/GDR share swap or exchange

An Indian company can also invest in a foreign company which is engaged in the same core
activity in exchange of ADRs/GDRs issued to the foreign company in accordance with the
ADR/GDR Scheme for the shares so acquired provided that the following conditions are
satisfied:

45
(i) The Indian company has already made an ADR/GDR issue and that such
ADRs/GDRs are currently listed on a stock exchange outside India.
(ii) The investment by the Indian company does not exceed the higher of an amount
equivalent to USD 100 Million or an amount equivalent to 10 times the export earnings of the
Indian company during the preceding financial year.
(iii) At least 80% of the average turnover of the Indian Party in the previous 3 financial
years is from the activities/sectors included in Schedule or the Indian Party has an annual
average export earnings of at least Indian Rupees1,000 Million in the previous 3 financial
years from the activities/sectors included in Schedule 1 to FEMA 19;
(iv) The ADR/GDR issue is backed by a fresh issue of underlying equity shares by the
Indian company.
(v) The total holding in the Indian company by non-resident holders does not exceed the
prescribed sectoral cap.
(vi) The valuation of the shares of the foreign company is done in the following manner:
a. If the shares of the foreign company are not listed, then as per the recommendation of an
investment banker, or
b. If the shares of the foreign company are listed then as per the formula prescribed therein.

Within 30 days from the date of issue of ADRs/GDRs in exchange of acquisition of shares of
the foreign company, the Indian company is required to submit a report in Form ODG with
RBI.

• RBI approval in special cases

In the event that the Indian company does not satisfy the eligibility conditions under
Regulations 6, 7 and 8, as stated hereinabove, it may make an application to RBI for special
approval. Such application for direct investment in Joint Venture/Wholly Owned Subsidiary
outside India, or by way of exchange for shares of a foreign company, is to be made in Form
ODI, or in Form ODB, respectively. In considering the application, the RBI may take into
account the following factors:
(i) Prima facie viability of the joint venture/wholly owned subsidiary abroad.
(ii) Contribution to external trade and other related benefits.
(iii) Financial position and business track record of the Indian company and the foreign
company; and
46
(iv) Expertise and experience of the foreign company in the same or related line of activity
of the joint venture or the wholly owned subsidiary abroad.

• Transfer by way of sale of shares of a JV/WOS

No Indian party is entitled to sell any share or security held by it in a Joint Venture or
Wholly Owned Subsidiary outside India, to any person, except as otherwise provided in
FEMA laws or with the permission of RBI.

• Pledge of Shares of Joint Ventures and Wholly Owned Subsidiaries

Further, FEMA 19 permits an Indian party to transfer, by way of pledge, shares held in a
Joint Venture or Wholly Owned Subsidiary outside India as a security for availing of fund
based or non-fund based facilities for itself or for the Joint Venture or Wholly Owned
Subsidiary from an authorised dealer or a public financial institution in India.

• Obligations of the Indian Party

Under Regulation 15, an Indian party which has acquired foreign security by way of direct
investment in accordance with FEMA 19, is obliged to:
(i) Receive share certificates or any other document as an evidence of investment in the
foreign entity to the satisfaction of RBI within 6 months, or such further period as RBI may
permit, from the date of effecting remittance or the date on which the amount to be
capitalised became due to the Indian party or the date on which the amount due was allowed
to be capitalised;
(ii) Repatriate to India, all dues receivable from the foreign entity, like dividend, royalty,
technical fees etc., within 60 days of its falling due, or such further period as RBI may permit;
(iii) Submit to RBI every year within 60 days from the date of expiry of the statutory
period as prescribed by the respective laws of the host country for finalisation of the audited
accounts of the Joint Venture/Wholly Owned Subsidiary outside India or such further period
as may be allowed by Reserve Bank, an annual performance report in Form APR in respect of
each Joint Venture or Wholly Owned Subsidiary outside India set up or acquired by the
Indian party and other reports or documents as may be stipulated by RBI.
CONCLUSION

47
The legal and financial reforms by the government of India since the early 1990's have
resulted in substantial growth of the Indian economy. The sea change in trade and investment
policies and the regulatory environment in the past decade, including, easing of restrictions
on foreign investment and acquisition, and the deregulation and privatization of many
industries, has probably been the most significant catalyst for the growth of cross border
M&A transactions involving India.
Recently, the press has reported of a decision by RBI that Indian companies merging with
overseas firms will continue to be treated as entities resident in the country under FEMA and
FEMA will be accordingly amended.[40] It has also clarified that payment by the foreign
company to shareholders of listed Indian companies being merged can be made in the form of
cash, shares or Indian Depository Receipts (“IDRs”) issued by the overseas companies.
Further since IDRs in their existing form do not have voting rights, the law has to be changed
to incorporate this change. This will be important if the merger involves allotting voting
rights to Indian shareholders or some sort of management control.

Indian economy is proving itself highly conducive to foreign investment.[41] While the
government policies supporting foreign investment have led to a renewed interest by foreign
investors and the consequent flow of overseas funds into India, the consequential domestic
economic growth has enabled the Indian entrepreneurs to come out and explore business
avenues on a global level. We believe that India will keep signing on the screen of cross
border M&A’s and would regain its status of the “Golden Bird”.

Source: http://www.taxmann.com

TATA CORUS ACQUISITION

48
On 20 October 2006 the board of directors of Anglo-Dutch steelmaker Corus accepted a $7.6
billion takeover bid from Tata Steel, the Indian steel company. The following months saw a
lot of negotiations from both sides of the deal. Tata Steel's bid to acquire Corus Group was
challenged by CSN, the Brazilian steel maker. Finally, on January 30, 2007, Tata Steel
purchased a 100% stake in the Corus Group at 608 pence per share in an all cash deal,
cumulatively valued at USD 12.04 Billion. The deal is the largest Indian takeover of a foreign
company and made Tata Steel the world's fifth-largest steel group.

The involved companies

'Tata Steel', formerly known as TISCO (Tata Iron and Steel Company Limited), was the
world's 56th largest and India's 2nd largest steel company with an annual crude steel capacity
of 3.8 million tonnes. It is based in Jamshedpur, Jharkhand, India. It is part of the Tata Group
of companies. Post Corus merger, Tata Steel is India's second-largest and second-most
profitable company in private sector with consolidated revenues of Rs 1,32,110 crore and net
profit of over Rs 12,350 crore during the year ended March 31, 2008. The company was also
recognized as the world's best steel producer by World Steel Dynamics in 2005. The
company is listed on BSE and NSE; and employs about 82,700 people (as of 2007).

Corus was formed from the merger of Koninklijke Hoogovens N.V. with British Steel Plc on
6 October 1999. It has major integrated steel plants at Port Talbot, South Wales; Scunthorpe,
North Lincolnshire; Teesside, Cleveland (all in the United Kingdom) and IJmuiden in the
Netherlands. It also has rolling mills situated at Shotton, North Wales (which manufactures
Colorcoat products), Trostre in Llanelli, Llanwern in Newport, South Wales, Rotherham and
Stocksbridge, South Yorkshire, England, Motherwell, North Lanarkshire, Scotland, Hayange,
France, and Bergen, Norway. In addition it has tube mills located at Corby, Stockton and
Hartlepool in England and Oosterhout, Arnhem, Zwijndrecht and Maastricht in the
Netherlands. Group turnover for the year to 31 December 2005 was £10.142 billion. Profits
were £580 million before tax and £451 million after tax.

Synergies between the two companies

There were a lot of apparent synergies between Tata Steel which was a low cost steel
producer in fast developing region of the world and Corus which was a high value product
manufacturer in the region of the world demanding value products. Some of the prominent
synergies that could arise from the deal were as follows:

• Tata was one of the lowest cost steel producers in the world and had self sufficiency
in raw material. Corus was fighting to keep its productions costs under control and
was on the lookout for sources of iron ore.

• Tata had a strong retail and distribution network in India and SE Asia. This would
give the European manufacturer a in-road into the emerging Asian markets. Tata was
a major supplier to the Indian auto industry and the demand for value added steel
products was growing in this market. Hence there would be a powerful combination
of high quality developed and low cost high growth markets

• There would be technology transfer and cross-fertilization of R&D capabilities

between the two companies that specialized in different areas of the value chain

49
 • There was a strong culture fit between the two organizations both of which highly
emphasized on continuous improvement and ethics. Tata steel's Continuous
Improvement Program ‘Aspire’with the core values :Trusteeship,integrity,respect for
individual, credibility and excellence. Corus's Continuous Improvement Program ‘The
Corus Way’ with the core values: code of ethics, integrity, creating value in steel,
customer focus, selective growth and respect for our people.

Counter bid by CSN

In November 2006,Brazilian steel marker Companhia Siderúrgica Nacional (CSN)challenged

Tata Steel's proposal for acquisition. They countered Tata Steel's offer of 455 pence per share
by offering 475 pence per share of Corus.

Proposed funding of the deal

Tata surprised the credit default swap segment of the derivative markets by deciding to raise
$6.17bn of debt for the deal through a new subsidiary of Corus called 'Tata Steel UK', rather
than by raising the debt itself. Tata's security credit rating is investment grade, whereas the
new subsidiary may not be. The higher risk associated with raising debt through a subsidiary
with a lower credit rating prompted Fitch Ratings to downgrade its rating of the credit swap
risks in the takeover to 'negative'. Fitch also stated that Corus' responsibility for the debt may
lead to Corus' own unsecured debt rating being downgraded. This does not affect the rating of
bonds issued by Corus which are secured debt.

The Deal

On January 31, 2007, following the lack of agreement on an offer, an auction process was
triggered. Following the conclusion of the auction process (at an unprecedented length of nine
rounds) conducted by the Panel in accordance with Rule 32.5 of the Code (the "Auction"),
Tata Steel announced the proposed acquisition of Corus Group at 608p per share, that being
5p more than CSN's top offer of 603p. The final valuation of Corus was thus put at $12.04
Billion

Timelines

• On October 20, 2006, Tata Steel announced that it had agreed to pick up a 100% stake
in the Anglo-Dutch steel maker Corus at 455 pence per share in an all cash deal,
cumulatively valued at GBP 4.3 billion (USD 8.04 billion).

• On November 19 2006, the Brazilian steel company CSN launched a counter offer for
Corus at 475 pence per share, valuing it at $8.4 billion.

• On December 11 2006, Tata preemptively upped the offer to 500 pence, which was
within hours trumped by CSN's offer of 515 pence per share, valuing the deal at $ 9.6
Billion. The Corus board promptly recommended both the revised offers to its
shareholders.

• On December 11, 2006, CSN announced a formal offer for the Company at an offer
price of 515 pence per Corus Share, valuing the deal at $ 9.6 Billion.. The CSN
Acquisition would also be implemented by way of a scheme of arrangement and is

50
 subject to a pre-condition that either Corus Shareholders reject the Tata Scheme or the
Tata Scheme is otherwise withdrawn by Corus or lapses. The Corus board promptly
recommended both the revised offers to its shareholders.

• Also on December 19, 2006, UK Watchdog the Panel on Takeovers and Mergers
announced that the last date for each of Tata and CSN to announce revised offers for
the Company, should they wish to do so, is 30 January 2007. They also warned that it
would begin an auction procedure if the two remained in competition.

• On January 31 2007 Tata Steel won their bid for Corus after offering 608 pence per
share, valuing Corus at $11.3bn

Final deal structure

• $3.5–3.8bn infusion from Tata Steel ($2bn as its equity contribution, $1.5–1.8bn
through a bridge loan)
• $5.6bn through a LBO ($3.05bn through senior term loan, $2.6bn through high yield
loan)

New Board formulation

A new board was formulated with representation from both the companies to provide a
common platform for strategy and integration.

• Mr. R.N. Tata will be the Chairman of Tata Steel and Corus
• Mr. Jim Leng will be the deputy chairman of Tata Steel and Corus
• Mr. B Muthuraman, Mr. Ishaat Hussain and Mr. Arun Gandhi to join the Corus board

Strategic and Integration Committee

A 'Strategic and Integration Committee' was formulated to develop and execute the
integration and further growth plans. Appropriate cross functional teams were formed under
this committee to look into specific issues.

DEMERGER OF BAJAJ

51
DEMERGER
“Division of a Company with two or more identifiable business units into two or more
separate companies.”

Bajaj Auto Ltd

Company History
Bajaj Auto Limited is India's largest manufacturer of scooters and motorcycles
Origins
The Bajaj Group was formed in the first days of India's independence from Britain
Its founder
Jamnalal Bajaj
Type Public
Founded 1945
Headquarters Pune, Maharashtra, India
Key people Rahul Bajaj (Chairman), Rajiv Bajaj (Managing Director), Sanjeev Bajaj

Aftermath of the unseemly fight between the Ambani brothers, Bajaj senior perhaps felt it’s
wiser to let sons Rajiv and Sanjeev have their own little empires to run. Rajeev’s love for
motorcycles & technology & has worked hard to build the business. Sanjeev has been more
of a number’s man, and will inherit finance.

Why the Demerger?

So that they could focus on & strengthen on these core businesses and competencies(Unlocking value)

a) The auto company would focus on auto business (market share in the motorcycle segment
increased from 22.9% in 2001-02 to 33.5% in 2006-07, at that time they recently
started operations in Indonesia. Exports were about 20%)

b) The wind power and financial services company will focus on wind-energy generation,
insurance, consumer finance and new initiatives in financial services space (has set up a total
of 138 windmills, Bajaj Allianz Life Insurance & General Insurance ranked second in among
private insurers in India)

c) The primary investment company will focus on new business opportunities. (Bajaj Auto
Finance with plans to become a full-fledged consumer finance company offering a complete
range of finance products)

The demerger enabled the investors to hold separate focused stocks.The demerger facilitated
more transparent benchmarking of the companies with its peers in their respective industries.
The restructuring created 3 separate entities

Unlisted Reason
It allowed the Bajaj family to increase their stake in the holding company cheaply. Since the
Bajaj family and its friends held about 47 per cent in the current Bajaj Auto, they increased
their stake to 50 % or more.They have increased to 50 %

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Structure prior to demerger

Post demerger structure Spun Off

The Board of Directors of Bajaj Auto Ltd agreed to a demerger on 17th May 2007.

Demerger effective date, viz. 20 February 2008.

For every share held in Bajaj Auto Limited. would continue to hold one share of BHIL
(formerly BAL) of the face value of Rs.10/- each fully paid up, has been allotted one share of
the new BAL of face value of Rs.10/- each fully paid up and has been allotted one share of
BFS of face value of Rs.5/- each fully paid up.

The demerger was done in two stages:

Stage I: The auto business will be transferred to Bajaj Holding and Investment Ltd. (BHIL),
plus Rs 1,500crore in cash and cash equivalents
a) Other financial, insurance and wind power business will be transferred to “Bajaj Finserv
Ltd” (BFL) plus Rs 800crore in cash and cash equivalents.
b) Existing Bajaj Auto to shall own 4.35crore shares of Rs 10 each i.e. Rs 43.5crore in BHIL
and 4.35crore shares of Rs 5 each i.e Rs 21.8crore.

Stage II:

a) BHIL would be renamed as new “Bajaj Auto” (BAL) to reflect the nature of business
b) The old BAL would be renamed as “Bajaj Holding & Investment Ltd” (BHIL) and would
be investment company

Share swap ratio

Each shareholder of existing Bajaj Auto shall receive

1 share of Rs 10 of BHIL – holding company for investments

1 share of Rs 10 of new BAL

1 share of Rs 5 of BFL

Share capital structure of new entities

Day1
Bajaj Auto Ltd: Bajaj Auto, Bajaj Finserv and Bajaj Holdings & Investments on day 1 of
relisting recorded a market cap of Rs 22,239 crore as against Rs 21,042 crore on March 13,
2008 which was the last day before the demerger, an increase of around 5.6 per cent.

The Auto division unlocked value for shareholders (its EVA more than that of composite
business)

BFL and BHIL showed negative EVA, clearly indicating that capital was not properly used
by them.

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It highlights that demergers can unlock significant shareholder value. The markets also
reacted positively, with both scripts appreciating when the news of the demerger broke out.

Results & Findings

Bajaj Allianz Life Insurance Co Ltd has reported a growth of 52% and its market share went
up to 6.98% in 2007-08 form 5.66% in 2006-07.
It has increased to 10.2% in 2008-09 then it reduced to 7.7% in 2009-10.
Rank 1st in Number of policies sold in the private sector.

Results & Findings

Net profit for the quarter ended March 2010 rose by 67.26% to Rs 251.90 million.

Capacity has been increased to 1 lakh units p.a. to 2.75lakhs per month and will be increased
to 3lakhs per month.

32% of the market share is under Bajaj Auto

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