MERGERS, ACQUISITIONS & CORPORATE RESTRUCTURING

Introduction
Terminology: Merger and Acquisition Its usually used to describe the fusing together of two or more entities, whether voluntary or enforced. Merger: Two entities join together to submerge their separate identities into a new entity. Acquisition: 1. One entity acquires a majority share-holding in another, while the identity remain in existence. Its also referred as take over 2. Often the term Merger is used for T/O, because of cultural impact on acquired entity no one likes to be taken over

Types of Merger
1. Horizontal Integration: Merger of entities in same line of business combines.

2. Vertical Integration: Acquisition of one entity by another, which is at different level in the chain of supply A. Forward Integration: Near to customer B. Backward Integration: Near to manufacturer (manufacturing)
3. Conglomerate: Two companies in unrelated businesses combine.

Why do merger happen ???

Synergy : NPV(AB) > NPV(A) + NPV(B) (or 2 + 2 = 5)

Reason for M&A

Basic: Maximize shareholders wealth/value Reasons: 1. Increase market share Power: Competitor merge (Tata Sky & Reliance Big TV) 2. Economies of scale: Bigger company, Duplication avoided (Big Bazaar with Subhiksha) 3. Combining complementary needs: Unique products but lake technical skills to market on large scale (JJMI Imports, they dont manufacture). Both entities gain something extra. 4. Improving efficiency: Lucrative market, But poor management (May b mgr like u MBA) or inefficient operation. 5. Lack of profitable investment Opportunity (Surplus Cash): Doesnt want to pay out surplus as dividend & need place to invest. 6. Tax Relief: Unclaimed loss (Income Tax - can be setoff within 8 year) 7. Reduce Competition: Caution- Shouldnt fall foul of the competition commission 8. Asset stripping: Even I dont know this ???? Satyam & Maytas Ghotala.

-ve Comments on reason for M&A

1. Diversification, to reduce risk: Acquiring an entity in a different line of activity may diversify risk, for the entity. However, this is irrelevant to the Shareholder Because, they can do diversification by investing in more than one entity. Hence, this doesnt maximize SH value.

2. Share of the target entity are undervalued: Although this is against the efficient markets theory (every one is smart). The shareholders of the entity planning the T/O would derive as such benefit (at a lower administration cost) from buying such undervalued shares themselves.

Defenses against takeover

Before the Bid: Any listed entity needs to be aware of the possibility of a bid at all times. There are no of ways, by which a management board can protect the entity. They are 1. Communicating effectively with shareholders: Have a public relation officer specializing in financial matters liaising with stockbrokers, keeping analyst fully informed and speaking to media/journalists. 2. Poison pills: Convert pref. share into equity share; sell attractive assets to reduce the lucrativeness of acquisition. 3. Pacman strategy: The target entity makes counter offer to bidder. This is possible, if target is strong & financial sound company. 4. Shark repellent Super majority: AOA is changed to require a high % of shares to approve an acquisition or merger Say 80% 5. High asset values: Fixed assets are revalued to current value (FMV IFRS) to ensure that SH are aware of true value per share. 6 6. The right SH: Managing SH to ensure Right SH are on board.

Defenses against takeover

After the Bid: 1. Rejection letter: Having received the bidders offer doct., the target company must issue any reply to SH within 14 days. In that majority of SH may reject the offer. 2. Profit forecast: Poor profit performance can be compensated by promising high future profit. (UK: Wellcome brought forward their financial results when attack from Glaxo). Sheikh Chilli ??? 3. Attacking the bidder: RNRL (ADAG) way of doing media campaigning & attack bidder. Concentrating on Bidders management style, overall strategy, method of increasing EPS, dubious A/c policies and lack of capital investments. 4. White Knight: Ask new, more acceptable bidder could present itself as a White knight to the board of target. This happens on the request of target company. 5. Competition commission: See Govt. Intervention by bringing in the competition commission. For this to be workable, it should be 7 proved that T/O is against public interest.

Methods of payment for an acquisition

1. Cash: Any one needs explanation on this ???
2. Share exchange: Large T/O always involves an exchange of shares. SH of target entity are given shares in acquiring entity based on exchange ratio. 3. Other: Debt Finance: raising new debt and paying for purchase consideration. However, this increase gearing (increase in financial risk). 4. Earn-out arrangements: Initial amount is paid (part of value) and balance is paid, if achieved specified performance targets.

Example 1
The cost of merger: cash Market price per share Nos. of shares Market value of company Entity A 75 100,000 7,500,000 Entity B 15 60,000 900,000

If A intends to pay `12 lakh - cash for B, what is the cost premium, if a) The share price does not anticipate merger; b) The share price includes a speculation element of `2 per share ? Answer: a) The share price accurately reflects the true value of the entity (in theory). Therefore, the cost to the bidder is simply: `1,200,000 `900,000, i.e. `300,000. The entity is paying 3 lakh for the identified benefit of merger. b) The cost is `300,000 + (60,000 X 2), i.e. `420,000. The entity is therefore really worth only 13 X `60,000 = `780,000. Anything addition over this is premium paid to T/O

Example 2
The cost of merger: Share exchange Entity A Entity B Market pri ce per share 75 15 Nos. of shares 100,000 60,000 Market value of company 7,500,000 900,000

1. If A offers 16,000 shares (` 12 L/75) instead of `12 lakh cash. The premium would be `300,000, but because Bs SH will own part of A, they will benefit from any future gains of the merged entity. Their share will be (16,000/(16,000+100,000), i.e. 13.8% 2. Suppose that the benefit of the merger have been identified by A to have a present value of 400,000 (i.e. A thinks that B is worth `900,000 + `400,000, or `1 300 000). Therefore the combined entity of A & B is worth: `7,500,000 + `1,300,000, or `8,800,000. Q : What is the true cost of merger to the acquired SH ???
Estimate of post acquisition prices A Propotion of ownership in merged entity Market Value: 8.8 L X propn of ownership Nos of shares currently in issue Price per share 86.20% 7,585,600 100,000 75.86 B 13.80% 1,214,400 60,000 20.24
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Example 2

(cond)

What we are attempting to do here is to value the share in the entity before the merger is completed, based on estimates of what the entity will be worth after the merger. The value also recognizes the split of the expected benefit, which will accrue to the combined form once the merger has taken place (Synergy).
The true cost can now be calculated:

`
60,000 share in B @ 20.2 Less: Current market value Benefit being paid to B's SH A B A-B 1,212,000 900,000 312,000

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Reasons why M&A fail

1. 2. 3. 4. The fit/lack of fit syndrome: Good fit of product or services, but a serious misfit in management style or corporate structure. Lack of industrial or commercial fit: In Horizontal of vertical T/O, where target entity turns out, not to have the product range or industrial position that acquirer anticipated. Lack of goal congruence: Goal mismatch, The treatment of the target entity might take away benefit of an otherwise excellent acquisition. (Marriage of highly qualified people) Cheap purchase: The turn around cost of T/O at what seems to be a good price may well turn out to be a high multiple of that price amt of resources like cash & management time could also damage the acquirers core business. Paying too much: Price paid beyond that which the acquirer consider acceptable to increase satisfactory the long term wealth of its SH. Failure to integrate effectively: Acquirer should have clear plan on How to integrate, level of autonomy to be granted. Such plan should cover aspects like Differences in management style, incompatibility in data information system and opposition by target company staff. 12 Inability to manage change: T/O is change, which needs to be managed. Radical change from established routine.

5.
6.

7.

Post-acquisition value enhancement strategies

1. The integration strategy must be in place before the acquisition is finalized. 2. Review each of the business unit for potential cost cutting/synergies or potential asset disposals. 3. Consider the effect on the workforce and determine how many, if any redundancies are likely to happen, then what will be the cost & how to handle that. 4. Risk diversification may well lower the cost of capital & therefore, increase the value of entity. 5. The entities cost of capital should be re-evaluated. 6. Make positive effort to communicate the post-acquisition effect on staff morals. 7. There may be economies of scale to identify and evaluated. 8. Undertake a review of assets, or resource audit, and consider selling noncore elements or redundant assets. 9. There may well be a need to pursue a more aggressive marketing strategy. 10. The risk of the acquisition needs to be evaluated. 11. There needs to be harmonization of corporate objective. 12. There needs to be some strategy to manage different culture in old 13 entities.

PRACTICAL QUESTION

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Q 1:

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Q 2:

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Q 3:

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Q 4:

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Q 5:

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Q 6:

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Q 7:

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Q 8:

M&A : AS A GROWTH
STRATEGY
STRATEGY MODELS/THEORIES
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Ansoffs Matrix

Penetration Market Development Product Development Diversification Star Question mark Cash cows Dogs

BCG Matrix Strategy Development Grand Strategy Matrix

Quadrant Quadrant Quadrant Quadrant

I II III IV

Product/ Industry Life Cycle

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Market Penetration

Product Development

Ansoffs Matrix

Market Development

Diversification

The Ansoff Growth matrix is a tool that helps businesses decide their product and market growth strategy. Ansoffs product/market growth matrix suggests that a business attempts to grow depend on whether it markets new or existing products in new or existing markets.
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Focuses on selling existing products into existing markets.

Four main objectives: 1. Maintain or increase the market share of current products competitive pricing strategies, advertising, sales promotion and perhaps more resources dedicated to personal selling 2. Secure dominance of growth markets 3. Restructure a mature market by driving out competitors - aggressive promotional campaign, supported by a pricing strategy >> market unattractive for competitors 4. Increase usage by existing customers Introducing loyalty schemes A market penetration marketing strategy is very much about business as usual. The business is focusing on markets and products it knows well. It is likely to have good information on competitors and on customer needs. It is unlikely, therefore, that this strategy will require much investment in new market research.

Business seeks to sell its existing products into new markets.

How ??? 1. 2. 3. 4. New geographical markets - exporting the product to a new country New product dimensions or packaging New distribution channels Different pricing policies to attract different customers or create new market segments

Introduce new products into existing markets. This strategy may require the development of new competencies and requires the business to develop modified products which can appeal to existing markets.

Markets new products in new markets. This is an more risky strategy, as the business is moving into markets, where it has little or no experience. For a business to adopt a diversification strategy, therefore, it must have a clear idea about what it expects to gain from the strategy and an honest assessment of the risks.

The BCG matrix or also called BCG model relates to marketing. The BCG model is a well-known portfolio management tool used in product life cycle theory. BCG matrix is often used to prioritize which products within company product mix get more funding and attention.

The BCG model is based on classification of products (and implicitly also company business 28 units) into four categories based on combinations of market growth and market share relative to the largest competitor.

Use of BCG matrix model ? Each product has its product life cycle, and each stage in product's life-cycle represents a different profile of risk and return. Generally, a company should maintain a balanced portfolio of products. Having a balanced product portfolio includes both high-growth products as well as low-growth products. A high-growth product - a new one that we are trying to get to some market. It takes some effort and resources to market it, to build distribution channels, and to build sales infrastructure, but it is a product that is expected to bring the gold in the future (iPod).

A low-growth product - an established product known by the market. Characteristics of this product do not change much, customers know what they are getting, and the price does not change much either. This product has only limited budget for marketing. The is the milking cow that brings in the constant flow of cash (Colgate toothpaste). Q is >> how do we exactly find out what phase our product is in, and how do we classify what we sell? Furthermore, we also ask, where does each of our products fit into our product mix? Should we promote one product more than the other one? The BCG matrix 29 can help with this. It also helps to decide what priorities to assign to not only products but also company departments and business units.

BCG
BCG STARS (high growth, high market share) - Stars are the leaders in the business but still need a lot of support for promotion a placement. - If market share is kept, Stars are likely to grow into cash cows.

BCG QUESTION MARKS (high growth, low market share)

- Question marks are essentially new products where buyers have yet to discover them. - The marketing strategy is to get markets to adopt these products. - Question marks have high demands and low returns due to low market share. - These products need to increase their market share quickly or they become dogs. - The best way to handle Question marks is to either invest heavily in them to gain market share or to sell them.

BCG CASH COWS (low growth, high market share) - If competitive advantage has been achieved, cash cows have high profit margins and generate a lot of cash flow. - Because of the low growth, promotion and placement investments are low. - Investments into supporting infrastructure can improve efficiency and increase cash flow more. - Cash cows are the products that businesses strive for.

BCG DOGS (low growth, low market share) - Dogs should be avoided and minimized. - Expensive turnaround plans usually do not help.

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Grand Strategy Matrix

Quadrant I

- For those firms which are in a strong competitive position and flourishing with rapid market growth, excellent strategic position; concentrate on current markets and products - concentration on current markets reveals the adoption of strategies such as market penetration and market development and concentration on current products calls for adoption of product development strategy.
- If firms have excessive resources then adopt the expansion program and indulge in backward, forward, or horizontal integration. The quadrant one firm also requires identifying the risk associated mainly if it is committed to a single product line To minimize risk, go for diversification.

Quadrant II - Firms having weak competitive position in fast growing market, Present market position must click in the minds of the management that they need to work An indepth analysis is necessary to identify the gray areas of incompetence and the reasons behind such ineffectiveness. - If does not find any suitable strategy to adopt than divestiture of some divisions can be considered as another option - Buy back the shares or to invest in the current venture in other divisions to strengthen the competitive position. However as last resort 32 to liquidation.

Grand Strategy Matrix

Quadrant III - The quadrant three firms are operating in a slow growth industry with a weak competitive position. These firms are prone to further decline which may result possibly in liquidation. To avoid - they needs to introduce drastic changes in almost all the areas of managing the company. The management has to change its philosophy and should necessarily adopt new approaches of governing the firm. The management should be willing to incur some extensive costs in the overall revamp of the organization. - Strategically retrenchment (assets reduction) would be the best option to be considered first. Secondly diversifying the overall business through shifting the resources should be evaluated as another choice (related or unrelated diversification). The final option is again divesture or liquidation. Quadrant IV

- The firms in quadrant IV - are characterized as having a strong competitive position but are operating in a slow growth industry. These firms have to quest for the promising growth areas and to exploit the opportunities in the growing markets as they possess the strengths to instigate diversified programs in growing industries.
- Ideally, these firms have limited requirements of funds for internal growth, whereas they enjoy the high cash flows due to the competitive position. TF, these firms can often hunt for related or unrelated diversification. Due to availability of excessive funds 33 quadrant IV firms can also pursue joint ventures.

Product Life Cycle (PLC) is a term used to describe individual stages in the life of a product. PLC is an important aspect of conducting business which affects strategic planning. PLC can be divided into several stages characterized by the revenue generated by the product. PLC is very similar to a life. A living being is first born (introduction), then it grows through its youth (growth) to become an adult (maturity). When it gets old, it declines both mentally and physically (decline), after which it eventually dies.

Analogy: Product developed >> Introduce it to the market >> Becomes known 34 by consumers, it grows >> Establishes a solid position in the market (mature) >> Overtaken by superior competitors product is eventually withdrawn.

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PLC
Introduction

Growth
or few products, relatively

- one undifferentiated

Product

- Product - New product features and packaging options; improvement of

product quality.

- Price - Generally high, assuming a skim pricing

strategy for a high profit margin to recoup development costs quickly. In some cases a penetration pricing strategy is used and introductory prices are set low to gain market share rapidly (Reliance mobile).

- Price - Maintained at a high level if

demand is high, or reduced to capture additional customers.

- Distribution - Distribution is selective and scattered as

the firm commences implementation of the distribution plan. awareness. Samples or trial incentives may be directed toward early adopters. Also intended to convince potential resellers to carry the product. Maturity

- Distribution - Distribution becomes

- Promotion - Promotion is aimed at building brand

more intensive. Trade discounts are minimal if resellers show a strong interest in the product.

- Promotion - Increased advertising to build brand preference.

Decline

- Product - Modifications are made and features are

- Product - The number of products in the product line may be reduced. Rejuvenate surviving
products to make them look new again.

added in order to differentiate the product from competing products that may have been introduced.

- Price - Prices may be lowered to liquidate

- Price - Possible price reductions in response to

competition while avoiding a price war.

inventory of discontinued products. Prices may be maintained for continued products serving a niche market.

- Distribution - New distribution channels and

- Promotion - Emphasis on differentiation and building
of brand loyalty. Incentives to get competitors' customers to switch.

incentives to resellers in order to avoid losing shelf space.

- Distribution becomes more selective. Channels that no longer are profitable are phased out. 36

Distribution

- Promotion - Expenditures are lower and aimed at

reinforcing products. the brand image for

continued

RESTRUCTURING

CORPORATE

What is Corporate Restructuring ?

Any substantial change in a companys financial structure, or ownership or control, or business portfolio. Designed to increase the value of the firm.

Restructuring

Improve capitalization

Improve debt composition

Change ownership and control

Its All About Value

How can corporate and financial restructuring create value ???

Liabilities
Equity

Assets
Fixed Assets & Investment
Operating Cash flows

Fix the financing

Debt

Fix the business

o o

The proportion of Equity & Debt : Achieve lowest WACC The kind of Equity & Debt : Short term? Long term? Convertibles?

Restructuring
What to do ? Figure out what the business is worth now Fix the business mix divestitures Fix the business strategic partner or merger Fix the financing improve D/E structure Fix the kind of equity Fix the kind of debt or hybrid financing Fix management or control Action points Use valuation model present value of free cash flows Value assets to be sold Value the merged firm with synergies Revalue firm under different leverage assumptions lowest WACC What can be done to make the equity more valuable to investors? What mix of debt is best suited to this business? Value the changes new control would produce

Type of restructuring
1. 2. Divestitures: Dispose or sale of part of the assets or business unit Spin-offs: All or substantial assets, liabilities, loans & business (on going concern basis) of one of the business division or undertaking to another company, in share exchange.

3.
4. 5. 6. 7. 8. 9.

Split-up: All or substantial A & L (on going concern basis) to more than one company, in share exchange. Transferor co. cease to exist.
Downsizing: Cut down operation, people, production. Outsourcing: Outsource non-critical operation to achieve focus on core function & operation. Carve-Out: Its a hybrid of divestiture & Spin-offs. Transfer all A & L to 100% subsidiary. Joint Venture Buy-back of Shares & Securities LBOs & MBOs:

LBOs & MBOs

Both are known as Going Private Management Buyouts: i. Management teams purchase of the bulk of the firms shares. ii. Create a win-win situation for shareholders who receive a premium for their stock and management who retain control. iii. To avoid lawsuits, the price paid must represent a higher premium to the current market price. iv. Cash proceeds of the sale could fund other defenses such as share buybacks. Leveraged Buyouts: i. ii. iii. iv. Borrowed funds are used to pay for all or most of the purchase price. Can be of an entire company or divisions of a company. The tangible assets of the company are used as collateral for the loans. Investors in LBOs are referred to as financial buyers because they are primarily focused on relatively short-to intermediate-term financial returns

LBOs & MBOs

Important differences: i. MBO leads to private companies while LBO leaves the company publicly traded with shareholders receiving stub equity in addition to cash payout.

ii. Under the MBO, the company saves on public reporting costs, but its equity shares remain illiquid securities. LBO preserves equity liquidity but exploits no (or few) savings on reporting. iii. Under the MBO, owners are insiders. In LBO, equity investors remain outsiders.
iv. Under MBO, control of the firm changes. In LBO, control may not necessarily change since the stub equity remains in the hands of public shareholders. v. The MBO creates strong conflict of interests, requiring the board to actively represent shareholders in the buyout negotiations. In LBO, ordinary business judgment rules applies.

LEGAL ASPECTS
OF

MERGER, ACQUISITION AND CORPORATE RESTRUCTURING

Which are applicable Laws ???

I. Companies Act, 1956

II.

SEBI (Buy back of securities) Regulations, 1998

III. SEBI (Substantial acquisition of shares & takeover) Regulations, 1997 IV. Clauses 40A & 40B of the listing agreements of BSE & NSE V. SEBI (Delisting of securities) Guidelines, 2003

Companies Act, 1956

Section 391
Deals with power of the High Court, when application is made for compromise or arrangement between company & its creditors or members Compromise: Pre-existence of dispute or difference, which is to be resolved Arrangement: No pre-existing dispute; type of arrangements are Reorganization of share capital consolidation or division of different classes or both Non-convertible Debenture >> Convert into equity shares Secure debenture holders agrees to release part or whole of the security Creditors agrees to accept part payment or debenture in lien or both Cumulative Pref. SH agrees to forgo unpaid dividends in part or in full

Section 394
Power of the High Court, when due to arrangement, where it involves transfer or A&L (part or full) to another company. This is without winding-up/liquidation of transferor company

Other Points
Even in the cases of listed companies, SEBI doesnt have any powers to approve or disapprove an amalgamation or a demerger

Companies Act, 1956

Condition precedent to approval from HC
Approval from Creditors and Members is to be obtained, by holding a meeting with them [u/s 391(1) HC may order for meeting] In practice, holding of creditors meeting can be dispensed off by making an application with HC, which would generally based on reputation and good standing of company, track record of past or pending litigation All creditors or Creditors above certain value are given individual notice u/s 391(2): If meeting happens then, resolution approving amalgamation or demerger has to be passed, by simple majority in nos.# and majority of value of creditors/members present and voting in person or by proxy

Report of the official liquidator

No order can be passed, unless official liquidator scrutinizes the books of accounts of transferor and submits a report to HC, stating that affairs of company are not against members or public interest u/s 394(1)

Notice to Central Government - u/s 394A

HC needs to serve notice to Central Govt. for application u/s 391 or 394 for representation, if any, by Central Government

Companies Act, 1956 Buy-Back of Securities

Condition for Buy-Back u/s 77A
Buy-back must be authorized by the AOA of company u/s 77A[2(a)] By Board resolution Maximum is 10% of paid-up equity capital and free reserves - u/s 77A[2(b)] By Special resolution in AGM Maximum of 25% of paid-up share capital and free reserves - u/s 77A[2(c)]

Sources of buy-back
Free reserves Securities premium accounts Proceeds of any shares or other securities, except from proceed of same kind of securities, i.e. buy-back of equity shares can be made using proceeds of preference share issue

Illustration

SEBI (Buy back of securities) Regulations, 1998

Condition of Buy-Back and General obligation of the Co.
(A) Buy-back only by way of From existing SH on proportionate basis through tender process From open market: (a) Book building process (b) Stock exchange (Company cannot buy-back shares through negotiated deals) (B) Company cannot buy-back its share in such a manner, that it would be required delist regulation 3(2) at-least 25% of each class of security issued by a company is required to get listed on any stock exchange [With prior approval limit can be lower or 10%, as the case may be (C) Consideration for buy-back to be paid in cash only (D) Cannot withdraw offer, once draft filed with SEBI & public announcement (E) No bonus share can be issued till the closure of the offer (F) Promoter or their associate cannot deal in the share in the stock exchange till the offer is open (G) No announcement of buy-back can be made during the pendency of any scheme of amalgamation or arrangement or compromise (H) A company needs to appoint a compliance office for buy-back of shares (I) Details of share brought back or destroyed have to be given to concerned stock exchange, within 7 days (J) Company cannot buy-back locked-in securities during the lock-in period (K) Within 2 days, needs to give details to public under regulation 19(7)

Clauses 40A & 40B of the listing agreements of BSE & NSE
Clause 40A
All listed company, needs to ensure minimum level of public SH @ 25% of total nos. of issued shares of a class or kind for the purpose of continuous listing [sub-clause (i)], except companies At the time of initial listing, had offered to public less than 25%, but not less than 10% of total nos. of issued share of class [sub-clause(ii)] Companied which reached or would reach in future, irrespective of their % holding at the time of initial listing a size of 2 Cr in nos. and ` 1000 Cr or more in terms of market capitalization [sub-clause(iii)] Public holding: Share outstanding other than promoters & promoter group and share held in custodian against overseas depository receipts If fails to comply then, liable to delist in terms of SEBI delisting guidelines [sub-clause(ix)]

Clause 40B
In case of takeover offer or due to change in management, the person who secures control of management, needs to comply with relevant provision of SEBI (substantial acquisition of shares & t/o) regulation, 1977 {Assignment - 4}

SEBI (Delisting of securities) Guidelines, 2003

Points to be noted
Delisting can be either compulsory or voluntary If delisting is from few stock exchange, while retaining listing at NSE - then, there is no need for giving exit opportunity. However, if delisting is from NSE or all stock exchange, except one then, SH must be given exit opportunity by reverse book building process

Procedure for voluntary delisting

Precondition: (A) Prior approval from SH by way of special resolution; (B) Public announcement; (C) Make application to concerned Stock exchange & comply with all relevant condition Exit Price: Should be through reverse book building process. Offer must have a floor price Based on average of 26 weeks quoted price, where shares are traded most frequently. Refusal by promoter to accept the final offer: If they do this they cannot delist Right of SH in case of compulsory delisting: Promoters are obliged to compensate @ FMV to SH, if they continue to hold securities in the delisted company and not sell them to promoters.

Reinstatement of delisted securities - clause 18.1

After a Cooling period of 2 yrs

ACCOUNTING & TAXATION ASPECTS

OF

MERGER, ACQUISITION AND CORPORATE RESTRUCTURING

AS 14: Type of amalgamation

AS 14
By way of Merger
(a) All assets & liabilities are transferred (b) 90% SH of transferor company become the SH in transferee company (c) Consideration for amalgamation is received wholly in equity share of transferee company (cash may be paid for fraction portion) (d) Business is intended to carried on as it is (e) No adjustment is intended to be made in the book value of assets & liabilities, when incorporated in final balance sheet

By way of purchase
If any one or more condition is not satisfied

AS 14: Accounting for amalgamation

AS 14 Accounting Method
By way of Merger (Pooling of interests)
(a) All assets, liabilities & reserve are carried @ Book Value (carrying amt ) & in the same form (b) Reserves should also be accounted in same head [capital into capital; Revenue into revenue; Revaluation into revaluation] (c) Difference between, (A) Share capital issued + Cash for fraction and (B) Share capital in old BS, should be adjusted in reserve i. First in capital reserve, then ii. Securities premium iii. Finally in Revenue reserves

By way of purchase (Purchase)

(a) All assets, liabilities & reserve are carried @ either, Book Value OR Fair Value (MV) on the date of amalgamation (b) Reserves should not be included, except Statutory Reserves (c) Difference between, (A) Purchase consideration and (B) value of A&L taken over, should be adjusted in reserve as i. +ve: Goodwill ii. -ve: Capital reserve

Accounting for Demerger

1. The ICAI has not prescribed any accounting treatment for demerger 2. However, transfer of assets may result into capital gain tax liability and hence, special exemption is given in income tax act, u/s 2(47) Condition for exemption are: 1. All assets and liabilities must be transferred at book value only 2. Any revaluation must be ignored 3. Liabilities & loans to be transferred as i. Specific liabilities & loans have to be transferred to the resulting company ii. Common loans & borrowing have to be apportioned in the same ration of common borrowing/loans iii. Expenses like deferred revenue expenditure, preliminary expenses, discount on issue of shares, etc have to be reduced from both side of the B/S, i.e. asset transferred and asset retained.

Income Tax Act, 1961

Amalgamation u/s 2(1B)
In order to qualify as amalgamation, condition to satisfy are (1) All the assets are transferred (2) All the liabilities are transferred (3) of SH should become SH in amalgamated company (all classes of shares, i.e. equity and preference shares)
Both type of amalgamation as per AS14 qualifies for exemption This section doesnt specify mode of payment to be made to SH it can be share, cash or/and bond.

Demerger u/s 2(19AA)

Both entities involved should be companies Condition u/s 391 to 394 of Companies Act, 1956 are compiled with There must be transfer of undertaking to resulting company (slide on accounting for demerger)

Capital gain tax exemption u/s 2 (47)

Above transfer are not considered as capital asset transfer & hence, no capital gain is chargeable

Implication on carry forward & set-off of losses and unabsorbed Depreciation

u/s 72 of the Income Tax Act, the losses arising under the head profit and gains of business or profession can be set-off against future profits, upto Eight assessment years Unabsorbed DepN can be carried forward indefinitely Conditions are: 1. Carry forward and set-off should be by same assessee 2. Amalgamating company has to be industrial undertaking, ship or a hotel or a banking company
manufacturing or processing of goods & computer software generation or distribution of electricity mining, etc

3. 4.

The amalgamating company has been engaged in the business in which such loss or unabsorbed DepN has occurred at least for THREE years Continue in the same business for FIVE years from date of amalgamation Reverse Mergers

i. Holding company merges with subsidiary or investee company ii. Profit-making company is merged with the loss making company

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