Mna Merchant Buyback Due diligence Valuation Overview

Introduction of Merger Types of Merger Introduction of Acquisition Types of Acquisition Difference between M & A Drivers for M & A Process Scheme of Arrangement Implications Case Laws

3 of

In common parlance it means combination of two or more commercial organizations into one.
Merging company loses its separate identity. It is fusion of two or more existing companies. All assets and liabilities of one or more Companies are transferred to another Company. Example:
Merger of Idea and Spice Telecom

4 of

Before Merger

Shareholders of X

Shareholders of Y

X Ltd

Y Ltd

5 of

After Merger
Option 1 Option 2 Option 3

Shareholders of X & Y

Shareholders of X & Y

Shareholders of X & Y

X Ltd

Y Ltd

New co Z

Note- Based on the swap ratio, the shareholders of the transferor company are issued shares of transferee company
6 of

We cant merge again. Our letterhead already takes up the entire page.
7 of

Vertical Merger:
Merger with suppliers or customers

Eg: Kochi Refineries Ltd Merges into Bharat Petroleum Corporation Limited

Cont

8 of

Horizontal Merger:
Between firms in the same

kind of business usually as competitors. Generally has the effect of reducing competition Countries committed to a competitive economy use Antitrust laws to prohibit such mergers.

Eg: Centurion bank of Punjab merging into HDFC Bank

Cont

9 of

Conglomerate Merger:
Lines of business have nothing to do with one another

Eg: Indo Gulf and Birla Global Finance merging into Indian Rayon. New Co rechristened Aditya Birla Nuvo
10 of

Purchase of a company by another company. Acquirer more interested in assets (including intangibles) / cash flows; less interested in mutual sharing of risks and benefits with the target company. Examples:
Tata Steel acquired Corus Group Plc.
Hindalco acquired Novelis Videocon acquired Daewoo Electronics Corp.

11 of

Acquisition - friendly or unfriendly

Friendly Takeovers: Acquirer's contacts target's management & proposes a deal. Target agrees and cooperates Unfriendly Takeovers: Acquiring firm makes a tender offer to target's shareholders. Meanwhile, target's management contests defensive measures
Why called unfriendly ?
Price is too low; fear to lose power, often jobs 12
of

Difference between Merger & Acquisition Merger

Acquisition

Consideration discharged by issue of shares of transferee co. Shareholders of merging co. will become shareholders of Merged co.

Consideration may be by cash or shares. Acquirer company shareholders have controlling interest.

Usually by negotiations.

May be friendly or hostile.

13 of

Drivers for Merger

Synergy of operations and economies of scale. Diversification. Capital restructuring. To increase the market share and to reduce the competition. Benefit of carry forward losses. Drop Down Effect of Global Restructuring Reduce the number of Companies in Group Backwards & Forward Integration
Cont

14 of

Expansion Focus on Core Activities Curtail Competition Bail Out Takeovers Tax Benefits

15 of

16 of

Due Diligence by parties Agreement on Appointed Date Valuation Scheme of Arrangement Approval by the Board of Directors Stock Exchange approval for listed Companies Meeting of Shareholders/ Creditors Registrar of Companies approval High Court approval Filing of High Court Order with ROC

17 of

Definitions: Appointed Date, Effective Date Undertaking Transferor Company Transferee Company Share Capital Transfer & Vesting of Undertaking of Transferor Company (Assets & Liabilities)

Cont

18 of

Conduct of Business during Interim Period (by transferee) Transfer of Employees, Legal Proceedings, Contracts and Deeds Consideration(issue of shares) Accounting Treatment Modifications to the Scheme Conditions for Effecting the Scheme(approvals on which it is dependent on and effect of non-approval) Cost relating to Scheme(shared by both)
19 of

Clause 24 of the Listing Agreement

Filing of the Scheme at least one month before filing

with the court for approval Pre and Post restructuring shareholding pattern to be intimated Filing of the notice, Explanatory Statement, etc. with the Stock Exchange Undertaking that the Scheme is in conformity with the Laws

20 of

High Court under whose jurisdiction the Registered office of the companies are situated Merger of WOS in the Holding Company Application by Holding Company can suffice Direction of convening meeting of shareholders & creditors

21 of

Publication of Advertisement Notice of the Meeting

At least 21 days clear notice To be sent under certificate of posting Explanatory Statements, Scheme & Proxy Form to be
attached to the notice

Conducting Meeting

Voting by polls Scrutinizers

Cont

22 of

Approval of Scheme at the Meeting

Majority in number and th in Value

Results of the meeting to be reported to the High Court

23 of

Petition for the Approval of the Scheme Approval of the Regional Director Approval of Official Liquidator (OL) Appeals Against High Courts Order - Possible

24 of

Order to be filed with the ROC within 30 days of receipt of the order of High Court Obtain RBI approval, if required

25 of

Payment of Stamp Duty Fixing Record Date for Allotment of Shares Arrangement for Listing of Newly Issued Shares

26 of

Case Laws
It is fair to use combination of three well known methods - asset value, yield value & market value
Hindustan

Lever Employees Union Vs. HLL (1995) 83 Com. Case 30 SC

Valuation job can be entrusted to people who know the Company rather than giving to outsiders who will start from scratch
Consolidated

Coffee V/s Arun Kumar Agrawal (1999) 21 SCL 11 (Kar) Cont

27 of

Case Laws

(Cont.)

Exchange Ratio not disturbed by Courts unless objected and found grossly unfair
Miheer

H. Mafatlal Vs. Mafatlal Industries (1996) 87 Com Cases 792 Dinesh v. Lakhani Vs. Parke-Davis (India) Ltd.. (2003) 47 SCL 80 (Bom)

Brands of a company are part of goodwill, cannot be separately valued

Brooke

Bond Lipton India Limited (1998) 15 SCL 81 (Cal)

28 of

 Accounting Income

Tax Stamp Duty Sales Tax Excise

29 of

Came into effect from April 1,1995 Deals with: Accounting for Amalgamation & Treatment of any resultant Goodwill or Reserves Applicable only to company form of Organisation Does not deal with Acquisition of the whole or part of a company by another In Amalgamation, one company loses its Identity; In Acquisition, identity of companies are maintained

Cont

30 of

Amalgamation means an amalgamation as per the provision of Companies Act, 1956 or any other law applicable to Companies, sections 391 to 394 of Companies Act, 1956 governs the provisions of amalgamation

In the nature of MERGER

In the nature of PURCHASE

31 of

Conditions for Amalgamation in the nature of Merger: All Assets & Liabilities are transferred At least 90% Share holders of transferor co. become share

holders of transferee co Consideration for Amalgamation to be discharged by issue of Equity shares Business of the transferor co. is intended to be carried on No Adjustments are intended to be made to the book value of assets and liabilities of transferor co
Cont

32 of

All the above conditions should be satisfied simultaneously If any of the above conditions are not fulfilled it would be termed as Amalgamation in the nature of Purchase

33 of

Amalgamation in the nature of MERGER

Pooling of Interest Method

Amalgamation in the nature of PURCHASE Purchase Method

34 of

All Assets, Liabilities & Reserves of Transferor company are taken over at their existing carrying values Identity of Reserves is preserved Uniform Accounting Policy to be adopted Difference between the Consideration and Share Capital of transferor company shall be adjusted in Reserves of the Merged company

35 of

MERGER OF A LTD. INTO B LTD.

Liabilities

A Ltd
Rs.

B Ltd
Rs.

Assets

A Ltd
Rs. 23 22

B Ltd
Rs. 112 40

Equity Share Capital General Reserve Profit and Loss Balance Debenture Redemption Reserve Loans Current Liabilities Provisions Total &

40 7 -

75 Fixed Assets 65 Investments 15 Current Assets, Loans & - Advances 25 Profit and Loss Balance 52 232 Total

5
20 12 84

34
5

80
-

84

232
36 of

Assumptions
i) The share exchange ratio for the merger of A Ltd. into B Ltd. is: "For every 2 equity shares of Rs. 10 each fully paid up of A Ltd., 1 equity share of Rs. 10 each fully paid up of B Ltd."; which means that B Ltd. will issue equity share capital of Rs. 20 to the shareholders of A Ltd. 20 25

ii) Market Value of Fixed Assets of A Ltd is Rs iii) Market Value of Investments of A Ltd is Rs

37 of

a) POOLING OF INTEREST METHOD (AT BOOK VALUE)

Liabilities Equity Share Capital [See Assumption i)] B Ltd Rs. 95 Fixed Assets (23+112) Assets B Ltd Rs. 135

General Reserve (7+65)

Profit and Loss A/c (-5+15) Debenture Redemption Reserve (5+0) Capital Reserve Loans (20+25) Current Liabilities and Provisions (12+52) Total

72 Investments (22+40)
10 Current Assets, Loans & Advances 5 (34+80) 20 45 64 311 Total

62

114

311

38 of

For Amalgamation under Pooling of Interest Method Exchange ratio, description and number of shares Difference between consideration and net identifiable assets acquired and treatment of the same

39 of

Assets taken either at existing carrying value or fair value, value can also be assigned to non existent assets/liabilities The identity of the reserves, other than the statutory reserves is not preserved In case of Statutory Reserves, Amalgamation Adjustment a/c of a Corresponding amount needs to be created which shall be reversed when separate identity of statutory reserve is no longer required Difference between Net Assets and Consideration: If Positive Capital Reserve If Negative - Goodwill
40 of

b) PURCHASE METHOD (AT MARKET VALUES)

Liabilities
Equity Share Capital Assumption i)] General Reserve Profit and Loss Balance Debenture Redemption Reserve (DRR) (5+0) Capital Reserve (Bal. Fig) [See

B Ltd
Rs.

Assets

B Ltd
Rs. 132 65

95 Fixed Assets (20+112) 65 Investments (25+40) 15 Current Assets, Loans & 5 Advances (34+80) 27 Amalgamation Adjustment 45 a/c (Created against DRR) 64 316 Total

114

Loans (20+25)
Current Liabilities and Provisions (12+52) Total

316

41 of

 For

Amalgamation under Purchase Method

for amalgamation and its

Consideration

description Difference between consideration and net identifiable assets acquired and treatment thereof including the period of amortisation of any goodwill arising on amalgamation.

42 of

For all Amalgamations

Name and general nature of the companies Effective date of amalgamation Method of accounting used Particulars of the scheme sanctioned under a
statute

43 of

Special treatment for Restructuring under Income Tax Act. Salient Features are: Definitions/ Qualifying Conditions Capital Gains Carry Forward & Set-off of Losses Others

Cont

44 of

Income Tax
Definition

(Cont.)

of Amalgamation / Merger Section

2(1B)

All the properties and liabilities to be transferred

Shareholders holding not less than 75% of value

of shares to become shareholders of Transferee Co.

Cont

45 of

Income Tax
Capital

(Cont.)

Gain Tax Sec 47(vi) & 47(vii)

Not a transfer - no liability for capital gains tax in the hands of the Transferor Co. as well as for shareholders
Cost

of acquisition of shares of Transferee Co. in the hands of Shareholders

COA of shares of Transferor Co. = COA of shares of Transferee Co.

Cont

46 of

Income Tax

(Cont.)

Depreciation on the Assets being transferred Transferee Company will be entitled to Depreciation on the written down value (WDV) of the block of assets transferred which will be the same as in the case of Transferor Company had it continued to hold such assets Depreciation to transferor company and transferee company in the year of merger shall be apportioned in the ratio of the number of days for which the assets were used.
Cont
47 of

Income Tax

(Cont.)

Carry Forward & Set-off Losses of Transferor Co Sec 72A Qualifying Companies Companies Owning Industrial Undertaking or Ship or Hotel Banking Companies Public Sector Companies engaged in business of operation of aircraft Business Losses 8 Years (Fresh Life) Unabsorbed Depreciation Unlimited Period
Cont
48 of

Income Tax
Conditions Transferor Company

(Cont.)

Engaged in Business for at least three years to

which the loss or Unabsorbed depreciation relates Holds th the book value of fixed assets held by it 2 years prior to the date of merger

Cont

49 of

Income Tax
Transferee company

(Cont.)

Holds for at least 5 years th of book value of fixed

assets of transferor Co. Continues business of transferor Co. for at least 5 years

Rule 9 C
Achieve 50% level of installed production capacity of undertaking of transferor co. before 4 years, and continue till 5th year
Cont
50 of

Income Tax
Closely

(Cont.)

held Co.- Section 79

Carry

forward Business loss would lapse if shareholding pattern changes by more than 49 % Applies only to Business loss and not to unabsorbed depreciation Section 79 overrides Section 72A

51 of

Stamp Duty Payable in the states of Rajasthan, Maharashtra, Gujarat & Karnataka is on Court Order Other States - Duty Payable on Immovable Properties & Movable Properties as per applicable rates

Cont

52 of

Stamp Duty
Rates

(Cont.)

for Maharashtra

Schedule 1 to the Bombay Stamp Act, 1958 under

Article 25(2)(da) relating to Conveyance

High Court order under section 394 of the Companies Act, in respect of amalgamation or reconstruction of companies 10% of market value of shares allotted in exchange and consideration if any paid but not exceeding the higher of: (i) 5% of Market Value of the immovable property in Maharashtra or (ii) 0.7% of Market Value of shares allotted in exchange and consideration if any paid
53 of

Market Capital of XYZ ltd is Rs 1,000 lacs, Where as Immovable property transferred amounts to Rs 100 lacs. In the above case Stamp Duty will be calculated as follows: Market value of Shares Immovable Property 1000 10% of market Value of Shares = 100 lacs 100 Not exceeding higher of: - 5% of Market Value of Immovable Property = 5 lacs - 0.7% of market value of Shares = 7 lacs Therefore the Stamp duty payable will be Rs. 7 Lacs
54 of

 On

Transfer of Business

Sales tax payable is on sale of goods. Business does not fall under the purview of goods

under the Sales tax Act. Transfer of business on a going concern basis. No sale of goods No Sales Tax However, this view is not free from doubt
Incentive

/ Deferment Loan Available to Transferee Co

55 of

 Excise

Law

New Registration No. CENVAT Credit available Raw Material Capital Goods

56 of