Laws Regulating Mergers And Acquisition In India

A merger is a combination of two companies where one corporation is completely

absorbed by another corporation. The less important company loses its identity and
becomes part of the more important corporation, which retains its identity. It may
involve absorption or consolidation.

Merger is also defined as amalgamation. Merger is the fusion of two or more existing
companies. All assets, liabilities and the stock of one company stand transferred to
Transferee Company in consideration of payment in the form of:
(i) Equity shares in the transferee company,
(ii) Debentures in the transferee company,
(iii) Cash, or
(iv) A mix of the above mode

Motives Behind Mergers Of The Company

(i) Economies of Scale: This generally refers to a method in which the average cost
per unit is decreased through increased production
(ii) Increased revenue /Increased Market Share: This motive assumes that the
company will be absorbing the major competitor and thus increase its to set prices.
(iii) Cross selling: For example, a bank buying a stock broker could then sell its
banking products to the stock brokers customers, while the broker can sign up the
bank’ customers for brokerage account.
(iv) Corporate Synergy: Better use of complimentary resources. It may take the form
of revenue enhancement and cost savings.
(v) Taxes: A profitable can buy a loss maker to use the target’s tax right off i.e.
wherein a sick company is bought by giants.
(vi) Geographical or other diversification: This is designed to smooth the earning
results of a company, which over the long term smoothens the stock price of the
company giving conservative investors more confidence in investing in the company.
However, this does not always deliver value to shareholders.

Types Of Mergers
From the perception of business organizations, there is a whole host of different
mergers. However, from an economist point of view i.e. based on the relationship
between the two merging companies, mergers are classified into following:
(1) Horizontal merger- Two companies that are in direct competition and share the
same product lines and markets i.e. it results in the consolidation of firms that are
direct rivals. E.g. Exxon and Mobil, Ford and Volvo, Volkswagen and Rolls Royce
and Lamborghini
(2) Vertical merger- A customer and company or a supplier and company i.e. merger
of firms that have actual or potential buyer-seller relationship eg. Ford- Bendix
(3) Conglomerate merger- generally a merger between companies which do not have
any common business areas or no common relationship of any kind. Consolidated
firma may sell related products or share marketing and distribution channels or
production processes.

On a general analysis, it can be concluded that Horizontal mergers eliminate sellers

and hence reshape the market structure i.e. they have direct impact on seller
concentration whereas vertical and conglomerate mergers do not affect market
structures e.g. the seller concentration directly. They do not have anticompetitive
consequences.

The circumstances and reasons for every merger are different and these circumstances
impact the way the deal is dealt, approached, managed and executed. .However, the
success of mergers depends on how well the deal makers can integrate two companies
while maintaining day-to-day operations. Each deal has its own flips which are
influenced by various extraneous factors such as human capital component and the
leadership. Much of it depends on the company’s leadership and the ability to retain
people who are key to company’s on going success. It is important, that both the
parties should be clear in their mind as to the motive of such acquisition i.e. there
should be censusad- idiom.

Profits, intellectual property, costumer base are peripheral or central to the acquiring
company, the motive will determine the risk profile of such M&A. Generally before
the onset of any deal, due diligence is conducted so as to gauze the risks involved, the
quantum of assets and liabilities that are acquired etc.

Laws Regulating Merger

Following are the laws that regulate the merger of the company:-
(I) The Companies Act , 1956
Section 390 to 395 of Companies Act, 1956 deal with arrangements, amalgamations,
mergers and the procedure to be followed for getting the arrangement, compromise or
the scheme of amalgamation approved. Though, section 391 deals with the issue of
compromise or arrangement which is different from the issue of amalgamation as deal
with under section 394, as section 394 too refers to the procedure under section 391
etc., all the section are to be seen together while understanding the procedure of
getting the scheme of amalgamation approved. Again, it is true that while the
procedure to be followed in case of amalgamation of two companies is wider than the
scheme of compromise or arrangement though there exist substantial overlapping.

The procedure to be followed while getting the scheme of amalgamation and the
important points, are as follows:-
(1) Any company, creditors of the company, class of them, members or the class of
members can file an application under section 391 seeking sanction of any scheme of
compromise or arrangement. However, by its very nature it can be understood that the
scheme of amalgamation is normally presented by the company. While filing an
application either under section 391 or section 394, the applicant is supposed to
disclose all material particulars in accordance with the provisions of the Act.

(2) Upon satisfying that the scheme is prima facie workable and fair, the Tribunal
order for the meeting of the members, class of members, creditors or the class of
creditors. Rather, passing an order calling for meeting, if the requirements of holding
meetings with class of shareholders or the members, are specifically dealt with in the
order calling meeting, then, there won’t be any subsequent litigation. The scope of
conduct of meeting with such class of members or the shareholders is wider in case of
amalgamation than where a scheme of compromise or arrangement is sought for
under section 391
(3) The scheme must get approved by the majority of the stake holders viz., the
members, class of members, creditors or such class of creditors. The scope of conduct
of meeting with the members, class of members, creditors or such class of creditors
will be restrictive some what in an application seeking compromise or arrangement.

(4) There should be due notice disclosing all material particulars and annexing the
copy of the scheme as the case may be while calling the meeting.

(5) In a case where amalgamation of two companies is sought for, before approving
the scheme of amalgamation, a report is to be received form the registrar of
companies that the approval of scheme will not prejudice the interests of the
shareholders.

(6) The Central Government is also required to file its report in an application seeking
approval of compromise, arrangement or the amalgamation as the case may be under
section 394A.

(7) After complying with all the requirements, if the scheme is approved, then, the
certified copy of the order is to be filed with the concerned authorities.

(II) The Competition Act ,2002

Following provisions of the Competition Act, 2002 deals with mergers of the
company:-
(1) Section 5 of the Competition Act, 2002 deals with “Combinations” which defines
combination by reference to assets and turnover
(a) exclusively in India and
(b) in India and outside India.

For example, an Indian company with turnover of Rs. 3000 crores cannot acquire
another Indian company without prior notification and approval of the Competition
Commission. On the other hand, a foreign company with turnover outside India of
more than USD 1.5 billion (or in excess of Rs. 4500 crores) may acquire a company
in India with sales just short of Rs. 1500 crores without any notification to (or
approval of) the Competition Commission being required.

(2) Section 6 of the Competition Act, 2002 states that, no person or enterprise shall
enter into a combination which causes or is likely to cause an appreciable adverse
effect on competition within the relevant market in India and such a combination shall
be void.
All types of intra-group combinations, mergers, demergers, reorganizations and other
similar transactions should be specifically exempted from the notification procedure
and appropriate clauses should be incorporated in sub-regulation 5(2) of the
Regulations. These transactions do not have any competitive impact on the market for
assessment under the Competition Act, Section 6.

(III) Foreign Exchange Management Act,1999

The foreign exchange laws relating to issuance and allotment of shares to foreign
entities are contained in The Foreign Exchange Management (Transfer or Issue of
Security by a person residing out of India) Regulation, 2000 issued by RBI vide GSR
no. 406(E) dated 3rd May, 2000. These regulations provide general guidelines on
issuance of shares or securities by an Indian entity to a person residing outside India
or recording in its books any transfer of security from or to such person. RBI has
issued detailed guidelines on foreign investment in India vide “Foreign Direct
Investment Scheme” contained in Schedule 1 of said regulation.

(IV) SEBI Take over Code 1994

SEBI Takeover Regulations permit consolidation of shares or voting rights beyond
15% up to 55%, provided the acquirer does not acquire more than 5% of shares or
voting rights of the target company in any financial year. [Regulation 11(1) of the
SEBI Takeover Regulations] However, acquisition of shares or voting rights beyond
26% would apparently attract the notification procedure under the Act. It should be
clarified that notification to CCI will not be required for consolidation of shares or
voting rights permitted under the SEBI Takeover Regulations. Similarly the acquirer
who has already acquired control of a company (say a listed company), after adhering
to all requirements of SEBI Takeover Regulations and also the Act, should be
exempted from the Act for further acquisition of shares or voting rights in the same
company.

(V) The Indian Income Tax Act (ITA), 1961

Merger has not been defined under the ITA but has been covered under the term
'amalgamation' as defined in section 2(1B) of the Act. To encourage restructuring,
merger and demerger has been given a special treatment in the Income-tax Act since
the beginning. The Finance Act, 1999 clarified many issues relating to Business
Reorganizations thereby facilitating and making business restructuring tax neutral. As
per Finance Minister this has been done to accelerate internal liberalization. Certain
provisions applicable to mergers/demergers are as under: Definition of
Amalgamation/Merger — Section 2(1B). Amalgamation means merger of either one
or more companies with another company or merger of two or more companies to
form one company in such a manner that:
(1) All the properties and liabilities of the transferor company/companies become the
properties and liabilities of Transferee Company.
(2) Shareholders holding not less than 75% of the value of shares in the transferor
company (other than shares which are held by, or by a nominee for, the transferee
company or its subsidiaries) become shareholders of the transferee company.

The following provisions would be applicable to merger only if the conditions laid
down in section 2(1B) relating to merger are fulfilled:
(1) Taxability in the hands of Transferee Company — Section 47(vi) & section 47
(a) The transfer of shares by the shareholders of the transferor company in lieu of
shares of the transferee company on merger is not regarded as transfer and hence
gains arising from the same are not chargeable to tax in the hands of the shareholders
of the transferee company. [Section 47(vii)]
(b) In case of merger, cost of acquisition of shares of the transferee company, which
were acquired in pursuant to merger will be the cost incurred for acquiring the shares
of the transferor company. [Section 49(2)]

(VI) Mandatory permission by the courts

Any scheme for mergers has to be sanctioned by the courts of the country. The
company act provides that the high court of the respective states where the transferor
and the transferee companies have their respective registered offices have the
necessary jurisdiction to direct the winding up or regulate the merger of the
companies registered in or outside India.

The high courts can also supervise any arrangements or modifications in the
arrangements after having sanctioned the scheme of mergers as per the section 392 of
the Company Act. Thereafter the courts would issue the necessary sanctions for the
scheme of mergers after dealing with the application for the merger if they are
convinced that the impending merger is “fair and reasonable”.

The courts also have a certain limit to their powers to exercise their jurisdiction which
have essentially evolved from their own rulings. For example, the courts will not
allow the merger to come through the intervention of the courts, if the same can be
effected through some other provisions of the Companies Act; further, the courts
cannot allow for the merger to proceed if there was something that the parties
themselves could not agree to; also, if the merger, if allowed, would be in
contravention of certain conditions laid down by the law, such a merger also cannot
be permitted. The courts have no special jurisdiction with regard to the issuance of
writs to entertain an appeal over a matter that is otherwise “final, conclusive and
binding” as per the section 391 of the Company act.

(VII) Stamp duty

Stamp act varies from state to State. As per Bombay Stamp Act, conveyance includes
an order in respect of amalgamation; by which property is transferred to or vested in
any other person. As per this Act, rate of stamp duty is 10 per cent.

Intellectual Property Due Diligence In Mergers And Acquisitions

The increased profile, frequency, and value of intellectual property related
transactions have elevated the need for all legal and financial professionals and
Intellectual Property (IP) owner to have thorough understanding of the assessment
and the valuation of these assets, and their role in commercial transaction. A detailed
assessment of intellectual property asset is becoming an increasingly integrated part
of commercial transaction. Due diligence is the process of investigating a party’s
ownership, right to use, and right to stop others from using the IP rights involved in
sale or merger ---the nature of transaction and the rights being acquired will determine
the extent and focus of the due diligence review. Due Diligence in IP for valuation
would help in building strategy, where in:-
(a) If Intellectual Property asset is underplayed the plans for maximization would be
discussed.
(b) If the Trademark has been maximized to the point that it has lost its cachet in the
market place, reclaiming may be considered.
(c) If mark is undergoing generalization and is becoming generic, reclaiming the mark
from slipping to generic status would need to be considered.
(d) Certain events can devalue an Intellectual Property Asset, in the same way a fire
can suddenly destroy a piece of real property. These sudden events in respect of IP
could be adverse publicity or personal injury arising from a product. An essential part
of the due diligence and valuation process accounts for the impact of product and
company-related events on assets – management can use risk information revealed in
the due diligence.
(e) Due diligence could highlight contingent risk which do not always arise from
Intellectual Property law itself but may be significantly affected by product liability
and contract law and other non Intellectual Property realms.
Therefore Intellectual Property due diligence and valuation can be correlated with the
overall legal due diligence to provide an accurate conclusion regarding the asset
present and future value

Legal Procedure For Bringing About Merger Of Companies

(1) Examination of object clauses:
The MOA of both the companies should be examined to check the power to
amalgamate is available. Further, the object clause of the merging company should
permit it to carry on the business of the merged company. If such clauses do not exist,
necessary approvals of the share holders, board of directors, and company law board
are required.
(2) Intimation to stock exchanges:
The stock exchanges where merging and merged companies are listed should be
informed about the merger proposal. From time to time, copies of all notices,
resolutions, and orders should be mailed to the concerned stock exchanges.
(3) Approval of the draft merger proposal by the respective boards:
The draft merger proposal should be approved by the respective BOD’s. The board of
each company should pass a resolution authorizing its directors/executives to pursue
the matter further.
(4) Application to high courts:
Once the drafts of merger proposal is approved by the respective boards, each
company should make an application to the high court of the state where its registered
office is situated so that it can convene the meetings of share holders and creditors for
passing the merger proposal.
(5) Dispatch of notice to share holders and creditors:
In order to convene the meetings of share holders and creditors, a notice and an
explanatory statement of the meeting, as approved by the high court, should be
dispatched by each company to its shareholders and creditors so that they get 21 days
advance intimation. The notice of the meetings should also be published in two news
papers.
(6) Holding of meetings of share holders and creditors:
A meeting of share holders should be held by each company for passing the scheme
of mergers at least 75% of shareholders who vote either in person or by proxy must
approve the scheme of merger. Same applies to creditors also.
(7) Petition to High Court for confirmation and passing of HC orders:
Once the mergers scheme is passed by the share holders and creditors, the companies
involved in the merger should present a petition to the HC for confirming the scheme
of merger. A notice about the same has to be published in 2 newspapers.
(8) Filing the order with the registrar:
Certified true copies of the high court order must be filed with the registrar of
companies within the time limit specified by the court.
(9) Transfer of assets and liabilities:
After the final orders have been passed by both the HC’s, all the assets and liabilities
of the merged company will have to be transferred to the merging company.
(10) Issue of shares and debentures:
The merging company, after fulfilling the provisions of the law, should issue shares
and debentures of the merging company. The new shares and debentures so issued
will then be listed on the stock exchange.
Waiting Period In Merger
International experience shows that 80-85% of mergers and acquisitions do not raise
competitive concerns and are generally approved between 30-60 days. The rest tend
to take longer time and, therefore, laws permit sufficient time for looking into
complex cases. The International Competition Network, an association of global
competition authorities, had recommended that the straight forward cases should be
dealt with within six weeks and complex cases within six months.
The Indian competition law prescribes a maximum of 210 days for determination of
combination, which includes mergers, amalgamations, acquisitions etc. This however
should not be read as the minimum period of compulsory wait for parties who will
notify the Competition Commission. In fact, the law clearly states that the compulsory
wait period is either 210 days from the filing of the notice or the order of the
Commission, whichever is earlier. In the event the Commission approves a proposed
combination on the 30th day, it can take effect on the 31st day. The internal time
limits within the overall gap of 210 days are proposed to be built in the regulations
that the Commission will be drafting, so that the over whelming proportion of
mergers would receive approval within a much shorter period.
The time lines prescribed under the Act and the Regulations do not take cognizance of
the compliances to be observed under other statutory provisions like the SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (‘SEBI
Takeover Regulations’). SEBI Takeover Regulations require the acquirer to complete
all procedures relating to the public offer including payment of consideration to the
shareholders who have accepted the offer, within 90 days from the date of public
announcement. Similarly, mergers and amalgamations get completed generally in 3-4
months’ time. Failure to make payments to the shareholders in the public offer within
the time stipulated in the SEBI Takeover Regulations entails payment of interest by
the acquirer at a rate as may be specified by SEBI. [Regulation 22(12) of the SEBI
Takeover Regulations] It would therefore be essential that the maximum turnaround
time for CCI should be reduced from 210 days to 90 days.

Conclusion
With the FDI policies becoming more liberalized, Mergers, Acquisitions and alliance
talks are heating up in India and are growing with an ever increasing cadence. They
are no more limited to one particular type of business. The list of past and anticipated
mergers covers every size and variety of business -- mergers are on the increase over
the whole marketplace, providing platforms for the small companies being acquired
by bigger ones. The basic reason behind mergers and acquisitions is that organizations
merge and form a single entity to achieve economies of scale, widen their reach,
acquire strategic skills, and gain competitive advantage. In simple terminology,
mergers are considered as an important tool by companies for purpose of expanding
their operation and increasing their profits, which in façade depends on the kind of
companies being merged. Indian markets have witnessed burgeoning trend in mergers
which may be due to business consolidation by large industrial houses, consolidation
of business by multinationals operating in India, increasing competition against
imports and acquisition activities. Therefore, it is ripe time for business houses and
corporates to watch the Indian market, and grab the opportunity.

The Securities Exchange Board of India (SEBI) has rewritten the rules for mergers
and acquisitions (M&A) in India. The committee set up by the market regulator on the
takeover code has proposed hiking the trigger for open offer to 25% from the current
15%. The panel has also recommended to raise the statutory open offer size to 100%
of equity
Review of SEBI Takeover Code

The Securities and Exchange Board of India (“SEBI”) has constituted the Takeover Regulations
Advisory Committee (“TRAC”) to review the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997 (“Takeover Regulations”) and to suggest suitable recommendations for
amendments to the Takeover Regulations as it considers necessary.

There have since been various prominent judgments by Hon’ble Supreme Court, various Hon’ble High
Courts and the Hon’ble Securities Appellate Tribunal that have further clarified and redefined the scope
and applicability of the Takeover Regulations. Further, during this period, SEBI has also issued various
informal guidance / interpretative letters regarding interpretation of various provisions of the Takeover
Regulations. A need has thus arisen to review and realign the Takeover Regulations with these
developments and to ensure that they reflect the best practices adopted globally.

As part of a consultative process in the exercise of reviewing this significant piece of legislation, the
TRAC has decided to seek inputs and suggestions from the public at the outset on any aspect of the
Takeover Regulations, about which sections of the public may believe that intervention in the form of a
review is required.

Bootstrapping (finance)
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The introduction to this article provides insufficient context for those
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introductory style. (October 2009)

Bootstrapping is a method for constructing a (zero-coupon) fixed-income yield curve

from the prices of a set of coupon-bearing products by forward substitution.

Using these zero-coupon products it becomes possible to derive par swap rates
(forward and spot) for all maturities by making a few assumptions (including linear
interpolation). The term structure of spot returns is recovered from the bond yields by
solving for them recursively, this iterative process is called the Bootstrap Method.

Given that, in general, we lack data points in a yield curve (there are only a fixed
number of products in the market) and more importantly these have varying coupon
frequencies, it makes sense to construct a curve of zero-coupon instruments from
which we can price any yield, whether forward or spot, without the need of more
external information.

A generic "algorithm" is described below; for more detail see Yield curve:
Construction of the full yield curve from market data.

General Methodology

1. Define set of yielding products, these will generally be coupon-bearing bonds

 2. Derive discount factors for all terms, these are the internal rates of return of
the bonds
3. 'Bootstrap' the zero-coupon curve step-by-step.

For each stage of the iterative process, we are interested in deriving the n-year zero-
coupon bond yield, also known as the internal rate of return of the bond. As there are
no intermediate payments on this bond, (all the interest and principal is realised at the
end of n years) it is sometimes called the n-year spot rate. To derive this rate we
observe that the theoretical price of a bond can be calculated as the present value of
the cash flows to be received in the future. In the case of swap rates, we want the par
bond rate (Swaps are priced at Par when created) and therefore we require that the
present value of the future cash flows and principal be equal to 100.

therefore

(this formula is precisely forward substitution)

where

• cfn is the coupon of the n-year bond

• dfi is the discount factor for that time period
• dfn is the discount factor for the entire period, from which we
derive the zero-rate.

Merger and Acquisition Process

Mergers and acquisitions are parts of corporate strategies that deal with
buying / selling or combining of business entities, which in turn, help a company to
grow quickly. However, merger and acquisition process is quite a complex process
that consists of a few steps. Before going for any merger and acquisition, both the
companies need to consider a few points and also need to go through some distinct
steps. The merger and acquisition process is also a big point of concern for the
companies involved in the deal, as the process could be full of risk and uncertainty.
However, prior effective planning and research could make the process easy and
simple.

Steps of Mergers and Acquisition Process

The process of merger and acquisition has the following steps:

Market Valuation

Before you go for any merger and acquisition, it is of utmost important that you must
know the present market value of the organization as well as its estimated future
financial performance. The information about organization, its history,
products/services, facilities and ownerships are reviewed. Sales organization and
marketing approaches are also taken into consideration.
 Exit Planning

The decision to sell business largely depends upon the future plan of the organization
– what does it target to achieve and how is it going to handle the wealth etc. Various
issues like estate planning, continuing business involvement, debt resolution etc. as
well as tax issues and business issues are considered before making exit planning. The
structure of the deal largely depends upon the available options. The form of
compensation (such as cash, secured notes, stock, convertible bonds, royalties, future
earnings share, consulting agreements, or buy back opportunities etc.) also plays a
major role here in determining the exit planning.

Structured Marketing Process

This is merger and acquisition process involves marketing of the business entity.
While doing the marketing, selling price is never divulged to the potential buyers.
Serious buyers are also identified and then encouraged during the process. Following
are the features of this phase.

• Seller agrees on the disseminated materials in advance. Buyer also needs to

sign a Non-Disclosure agreement.
• Seller also presents Memorandum and Profiles, which factually showcases the
business.
• Database of prospective buyers are searched.
• Assessment and screening of buyers are done.
• Special focuses are given on he personal needs of the seller during structuring
of deals.
• Final letter of intent is developed after a phase of negotiation.

Letter of Intent

Both, buyer and seller take the letter of intent to their respective attorneys to find out
whether there is any scope of further negotiation left or not. Issues like price and
terms, deciding on due diligence period, deal structure, purchase price adjustments,
earn out provisions liability obligations, ISRA and ERISA issues, Non-solicitation
agreement, Breakup fees and no shop provisions, pre closing tax liabilities, product
liability issues, post closing insurance policies, representations and warranties, and
indemnification issues etc. are negotiated in the Letter of Intent. After reviewing, a
Definitive Purchase Agreement is prepared.

Buyer Due Diligence

This is the phase in the merger and acquisition process where seller makes its business
process open for the buyer, so that it can make an in-depth investigation on the
business as well as its attorneys, bankers, accountants, tad advisors etc.

Definitive Purchase Agreement

Finally Definitive Purchase Agreement are made, which states the transaction details
including regulatory approvals, financing sources and other conditions of sale.
Difference Between Mergers and Acquisitions
Though the two words mergers and acquisitions are often spoken in the
same breath and are also used in such a way as if they are synonymous, however,
there are certain differences between mergers and acquisitions.

Merger Acquisition

The case when two companies (often of same

The case when one company takes
size) decide to move forward as a single new
over another and establishes itself as
company instead of operating business
the new owner of the business.
separately.

The stocks of both the companies are The buyer company “swallows” the
surrendered, while new stocks are issued business of the target company,
afresh. which ceases to exist.

For example, Glaxo Wellcome and SmithKline

Dr. Reddy's Labs acquired
Beehcam ceased to exist and merged to
Betapharm through an agreement
become a new company, known as Glaxo
amounting $597 million.
SmithKline.

A buyout agreement can also be known as a merger when both owners

mutually decide to combine their business in the best interest of their firms. But when
the agreement is hostile, or when the target firm is unwilling to be bought, it is
considered as an acquisition.

The Real Picture

It's quite rare to find actual mergers in practice. In majority of the cases, when one
company buys another, according to the terms of the deal, it allows acquired company
to proclaim that it's a merger, in spite of the fact that, it's actually an acquisition.
Being bought out may send negative impression about the company, and hence the
acquired company prefers to call it merger.

A Merger or an Acquisition?

So, the big question is when a purchase should be called a merger and when it should
be described as an acquisition? It depends on how the two parties involved want to
announce it like and how is it communicated to the board of directors, employees and
shareholders of the company.

A purchase deal can also be denoted as merger if the CEOs of both the companies
agree upon the decision. However, during an unfriendly deal, when target company
doesn't wish to be purchased, the deal is called an acquisition.

Possible Impact of Mergers and Acquisitions

 Have a look at the impact of Mergers and Acquisitions on different segments of
business.

• Impacts on Employees

Mergers and acquisitions may have great economic impact on the employees
of the organization. In fact, mergers and acquisitions could be pretty difficult
for the employees as there could always be the possibility of layoffs after any
merger or acquisition. If the merged company is pretty sufficient in terms of
business capabilities, it doesn't need the same amount of employees that it
previously had to do the same amount of business. As a result, layoffs are
quite inevitable. Besides, those who are working, would also see some
changes in the corporate culture. Due to the changes in the operating
environment and business procedures, employees may also suffer from
emotional and physical problems.

• Impact on Management

The percentage of job loss may be higher in the management level than the
general employees. The reason behind this is the corporate culture clash. Due
to change in corporate culture of the organization, many managerial level
professionals, on behalf of their superiors, need to implement the corporate
policies that they might not agree with. It involves high level of stress.

• Impact on Shareholders

Impact of mergers and acquisitions also include some economic impact on the
shareholders. If it is a purchase, the shareholders of the acquired company get
highly benefited from the acquisition as the acquiring company pays a hefty
amount for the acquisition. On the other hand, the shareholders of the
acquiring company suffer some losses after the acquisition due to the
acquisition premium and augmented debt load.

• Impact on Competition

Mergers and acquisitions have different impact as far as market competitions

are concerned. Different industry has different level of competitions after the
mergers and acquisitions. For example, the competition in the financial
services industry is relatively constant. On the other hand, change of powers
can also be observed among the market players.

Why Mergers and Acquisitions in India?

The factors responsible for making the merger and acquisition deals favorable in India
are:

• Dynamic government policies

 • Corporate investments in industry
• Economic stability
• “ready to experiment” attitude of Indian industrialists

Sectors like pharmaceuticals, IT, ITES, telecommunications, steel, construction, etc,

have proved their worth in the international scenario and the rising participation of
Indian firms in signing M&A deals has further triggered the acquisition activities in
India.

In spite of the massive downturn in 2009, the future of M&A deals in India looks
promising. Indian telecom major Bharti Airtel is all set to merge with its South
African counterpart MTN, with a deal worth USD 23 billion. According to the
agreement Bharti Airtel would obtain 49% of stake in MTN and the South African
telecom major would acquire 36% of stake in Bharti Airtel.

Ten biggest Mergers and Acquisitions deals in India

• Tata Steel acquired 100% stake in Corus Group on January 30, 2007. It was an
all cash deal which cumulatively amounted to $12.2 billion.

• Vodafone purchased administering interest of 67% owned by Hutch-Essar for

a total worth of $11.1 billion on February 11, 2007.

• India Aluminium and copper giant Hindalco Industries purchased Canada-

based firm Novelis Inc in February 2007. The total worth of the deal was $6-
billion.

• Indian pharma industry registered its first biggest in 2008 M&A deal through
the acquisition of Japanese pharmaceutical company Daiichi Sankyo by Indian
major Ranbaxy for $4.5 billion.

• The Oil and Natural Gas Corp purchased Imperial Energy Plc in January 2009.
The deal amounted to $2.8 billion and was considered as one of the biggest
takeovers after 96.8% of London based companies' shareholders
acknowledged the buyout proposal.

• In November 2008 NTT DoCoMo, the Japan based telecom firm acquired
26% stake in Tata Teleservices for USD 2.7 billion.

• India's financial industry saw the merging of two prominent banks - HDFC
Bank and Centurion Bank of Punjab. The deal took place in February 2008 for
$2.4 billion.

• Tata Motors acquired Jaguar and Land Rover brands from Ford Motor in
March 2008. The deal amounted to $2.3 billion.

• 2009 saw the acquisition Asarco LLC by Sterlite Industries Ltd's for $1.8
billion making it ninth biggest-ever M&A agreement involving an Indian
company.
 • In May 2007, Suzlon Energy obtained the Germany-based wind turbine
producer Repower. The 10th largest in India, the M&A deal amounted to $1.7
billion.

Merger and Acquisition Strategy Process

The merger and acquisition strategies may differ from company to company and also
depend a lot on the policy of the respective organization. However, merger and
acquisition strategies have got some distinct process, based on which, the strategies
are devised.

Determine Business Plan Drivers

Merger and acquisition strategies are deduced from the strategic business plan of the
organization. So, in merger and acquisition strategies, you firstly need to find out the
way to accelerate your strategic business plan through the M&A. You need to
transform the strategic business plan of your organization into a set of drivers, which
your merger and acquisition strategies would address.

While chalking out strategies, you need to consider the points like the markets of your
intended business, the market share that you are eyeing for in each market, the
products and technologies that you would require, the geographic locations where you
would operate your business in, the skills and resources that you would require, the
financial targets, and the risk amount etc.

Determine Acquisition Financing Constraints

Now, you need to find out if there are any financial constraints for supporting the
acquisition. Funds for acquisitions may come through various ways like cash, debt,
public and private equities, PIPEs, minority investments, earn outs etc. You need to
consider a few facts like the availability of untapped credit facilities, surplus cash, or
untapped equity, the amount of new equity and new debt that your organization can
raise etc. You also need to calculate the amount of returns that you must achieve.

Develop Acquisition Candidate List

Now you have to identify the specific companies (private and public) that you are
eyeing for acquisition. You can identify those by market research, public stock
research, referrals from board members, investment bankers, investors and attorneys,
and even recommendations from your employees. You also need to develop summary
profile for every company.

Build Preliminary Valuation Models

This stage is to calculate the initial estimated acquisition cost, the estimated returns
etc. Many organizations have their own formats for presenting preliminary valuation.
Rate/Rank Acquisition Candidates

Rate or rank the acquisition candidates according to their impact on business and
feasibility of closing the deal. This process will help you in understanding the relative
impacts of the acquisitions.

Review and Approve the Strategy

This is the time to review and approve your merger and acquisition strategies. You
need to find out whether all the critical stakeholders like board members, investors
etc. agree with it or not. If everyone gives their nods on the strategies, you can go
ahead with the merger or acquisition.
Important Terminology Related to Mergers and Acquisitions

• Asset Stripping – Asset Stripping is the process in which a firm takes over
another firm and sells its asset in fractions in order to come up with a cost that
would match the total takeover expenditure.

• Demerger or Spin off – Demerger refers to the practice of corporate

reorganization. During this process a fraction of the firm may break up and
establish itself as a new business identity.

• Black Knight – The term generally refers to the firm which takes over the
target firm in a hostile manner.

• Carve - out – The procedure of trading a small part of the firm as an Initial
Public Offering is known as carve-out.

•Poison Pill or Suicide Pill Defense – Poison Pill is an

approach which is adopted by the target firm to present itself as less likable for
an unfriendly subjugation. The shareholders have full privilege to exchange
their bonds at a premium if the buyout takes place.

• Greenmail – Greenmail refers to the state of affairs where the target firm buys
back its own assets or shares from the bidding firm at a greater cost.

• Dawn Raid – The process of purchasing shares of the target firm anticipating
the decline in market costs till the completion of the takeover is known as
Dawn Raid.

• Grey Knight – A firm that acquires another under ambiguous conditions or

without any comprehensible intentions is known as a grey knight.

• Macaroni Defense – Macaroni Defense is an approach that is implemented by

the firms to protect them from any hostile subjugation. A company can
prevent itself by issuing bonds that can be exchanged at a higher price.
 • Management Buy In – This term refers to the process where a firm buys and
invests in another and employs their managers and officials to administer the
new established business identity.

• Hostile Takeover – Unfriendly or Hostile acquisitions takes place when the

management of the target firm does not have any prior knowledge about it or
does not mutually agree for the proposal. The disagreements between the chief
executives of the target firm may not be long-lasting and the hostile
subjugation may take up the form of friendly takeover. This practice is
prevalent among the British and American firms. However, some of them are
still against hostile subjugations.

• Management Buy Out – A management buy out refers to the process in

which the management buys a firm in collaboration with its undertaking
entrepreneurs.

Why Mergers and Acquisitions Fail?

There could be several reasons behind the failure of mergers and acquisitions. Many
company look mergers and acquisitions as the solution to their problems. But before
going for merger and acquisition, they do not introspect themselves. Before an
organization can go for mergers and acquisitions, it needs to consider a lot. Both the
parties, viz. buyer and seller need to do proper research and analysis before going for
mergers and acquisitions. Following could be the reasons behind the failure of
mergers and acquisitions.

Cultural Difference

One of the major reasons behind the failure of mergers and acquisitions is the cultural
difference between the organizations. It often becomes very tough to integrate the
cultures of two different companies, who often have been the competitors. The
mismatch of culture leads to deterring working environment, which in turn ensure the
downturn of the organization.

Flawed Intention
Flawed intentions often become the main reason behind the failure of mergers and
acquisitions. Companies often go for mergers and acquisitions getting influenced by
the booming stock market. Sometimes, organizations also go for mergers just to
imitate others. In all these cases, the outcome can be too encouraging.

Often the ego of the executive can become the cause of unsuccessful merger. Top
executives often tend to go for mergers under the influence of bankers, lawyers and
other advisers who earn hefty fees from the clients.

Mergers can also happen due to generalized fear. The incidents like technological
advancement or change in economic scenario can make an organization to go for a
change. The organization may end up in going for a merger.

Due to mergers, managers often need to concentrate and invest time to the deal. As a
result, they often get diverted from their work and start neglecting their core business.
The employees may also get emotionally confused in the new environment after the
merger. Hence, the work gets hampered.

How to Prevent the Failure

Several initiatives can be undertaken in order to prevent the failure of mergers and
acquisitions. Following are those:

• Continuous communication is of utmost necessary across all levels –

employees, stakeholders, customers, suppliers and government leaders.

• Managers have to be transparent and should always tell the truth. By this way,
they can win the trust of the employees and others and maintain a healthy
environment.

• During the merger process, higher management professionals must be ready to

greet a new or modified culture. They need to be very patient in hearing the
concerns of other people and employees.

• Management need to identify the talents in both the organizations who may
play major roles in the restructuring of the organization. Management must
retain those talents.

Valuation Models in Mergers and Acquisitions

There are a number of methods used in mergers and acquisition valuations. Some of
those can be listed as:

Replacement Cost Method

In Replacement Cost Method, cost of replacing the target company is calculated and
acquisitions are based on that. Here the value of all the equipments and staffing costs
are taken into consideration. The acquiring company offers to buy all these from the
target company at the given cost. Replacement cost method isn't applicable to service
industry, where key assets (people and ideas) are hard to value.

Discounted Cash Flow (DCF) Method

Discounted Cash Flow (DCF) method is one of the major valuation tools in mergers
and acquisitions. It calculates the current value of the organization according to the
estimated future cash flows.

Estimated Cash Flow = Net Income + Depreciation/Amortization - Capital

Expenditures - Change in Working Capital

These estimated cash flows are discounted to a present value. Here, organization's
Weighted Average Costs of Capital (WACC) is used for the calculation. DCF method
is one of the strongest methods of valuation.
 Economic Profit Model

In this model, the value of the organization is calculated by summing up the amount
of capital invested and a premium equal to the current value of the value created every
year moving forward.

Economic Profit = Invested Capital x (Return on Invested Capital - Weighted

Average Cost of Capital)

Economic Profit = Net Operating Profit Less Adjusted Taxes - (Invested Capital x
Weighted Average Cost of Capital)

Value = Invested Capital + Current Value of Estimated Economic Profit

Price-Earnings Ratios (P/E Ratio)

This is one of the comparative methods adopted by the acquiring companies, based on
which they put forward their offers. Here, acquiring company offers multiple of the
target company's earnings.

Enterprise-Value-to-Sales Ratio (EV/Sales)

Here, acquiring company offers multiple of the revenues. It also keeps a tab on the
price-to-sales ration of other companies.

Laws governing Mergers and Acquisitions in India

• Mergers and Acquisitions in India are governed by the Indian Companies

Act, 1956, under Sections 391 to 394. Although mergers and acquisitions may
be instigated through mutual agreements between the two firms, the procedure
remains chiefly court driven. The approval of the High Court is highly
desirable for the commencement of any such process and the proposal for any
merger or acquisition should be sanctioned by a 3/4th of the shareholders or
creditors present at the General Board Meetings of the concerned firm.

• Indian antagonism law permits the utmost time period of 210 days for the
companies for going ahead with the process of merger or acquisition. The
allotted time period is clearly different from the minimum obligatory stay
period for claimants. According to the law, the obligatory time frame for
claimants can either be 210 days commencing from the filing of the notice or
acknowledgment of the Commission's order.

• The entry limits for companies merging under the

Indian law are considerably high. The entry limits are allocated in context of
asset worth or in context of the company's annual incomes. The entry limits in
India are higher than the European Union and are twofold as compared to the
United Kingdom.
 • The Indian M&A laws also permit the combination of any Indian firm with its
international counterparts, providing the cross-border firm has its set up in
India.

There have been recent modifications in the Competition Act, 2002. It has replaced
the voluntary announcement system with a mandatory one. Out of 106 nations which
have formulated competition laws, only 9 are acclaimed with a voluntary
announcement system. Voluntary announcement systems are often correlated with
business ambiguities and if the companies are identified for practicing monopoly after
merging, the law strictly order them opt for de-merging of the business identity.

Provisions under Mergers and Acquisitions Laws in India

• Provision for tax allowances for mergers or de-mergers between two business
identities is allocated under the Indian Income tax Act. To qualify the
allocation, these mergers or de-mergers are required to full the requirements
related to section 2(19AA) and section 2(1B) of the Indian Income Tax Act as
per the pertinent state of affairs.

• Under the “Indian I-T tax Act”, the firm, either Indian or foreign, qualifies for
certain tax exemptions from the capital profits during the transfers of shares.

• In case of “foreign company mergers”, a situation where two foreign firms are
merged and the new formed identity is owned by an Indian firm, a different set
of guidelines are allotted. Hence the share allocation in the targeted foreign
business identity would be acknowledged as a transfer and would be
chargeable under the Indian tax law.

• As per the clauses mentioned under section 5(1) of the Indian Income Tax Act,
the international earnings by an Indian firm would fall under the category of
'scope of income' for the Indian firm.