MnA_Module_11

MODULE 11
MEGERS AND ACQUISITIONS: TAKEOVER, COMPETITION AND

ANTITRUST

11.1 Introduction to Mergers and Acquisitions

The unification of companies is defined as Mergers and Acquisitions (M&A). The integration
of two companies to form one is known as Merger, while Acquisition is defined as takeover
of one company by the other. M&A is one of the major aspects of corporate finance world.
With an aim of wealth maximization, increased share market, companies keep assessing
opportunities through the course of merger or acquisition.

Mergers & Acquisitions can take place:
• by purchasing assets
• by purchasing common shares
• by exchange of shares for assets
• by exchanging shares for shares

11.2 Stages involved in any M&A:
Stage 1: Pre-acquisition review: this would include self assessment of the acquiring
company with regards to the need for M&A, ascertain the valuation (undervalued is the key)
and chalk out the growth plan through the target.
Stage 2: Search and screen targets: This would include searching for the possible apt
takeover candidates. This process is mainly to scan for a good strategic fit for the acquiring
company.
Stage 3: Investigate and valuation of the target: Once the appropriate company is shortlisted
through primary screening, detailed analysis of the target company has to be done. This is
also referred to as due diligence.
Stage 4: Acquire the target through negotiations: Once the target company is selected, the
next step is to start negotiations to come to consensus for a negotiated merger or a bear hug.

This brings both the companies to agree mutually to the deal for the long term working of the
M&A.
Stage 5:Post merger integration: If all the above steps fall in place, there is a formal
announcement of the agreement of merger by both the participating companies.

11.3 Merits of Combining Forces

11.3.1 Enhanced economies of scale- When the raw materials are purchased in large
quantities, the cost get reduced.
11.3.2 Increase in Market share- When the two companies are in the same industry

and bring their resources together, it results in larger market share.
11.3.3 Reduced labour costs- when the two business units are merged, there is an
elimination of staff which helps to reduce the costs.
11.3.4 Increased distribution capabilities- due to the expansion of geographical
area, companies may be able to add to their distribution network and enhance their
service area.
11.3.5 Improved staff- the labour pool gets expanded due to which the larger

company can aid in growth and development.

In India, Companies Act, 2002 and the Securities and Exchange Board of India (SEBI), 1992
regulate mergers. In the Companies Act, 1956, mergers are regulated to protect the interests
of the secured creditors and in the SEBI Act it tries to protect the interest of investors.
Though the objectives of both the acts are distinct and mutually exclusive and the purpose of
Competition Act, 2002, is much broader. Its aim is to preserve the appreciable adverse effect
on trade related competition in the relevant market in India.1

11.4 Meaning of Acquisition/Takeover

1Mergers and role of Competition Commission of India, thelegiteye,
http://thelegiteye.in/2017/05/31/mergers-role-competition-commission-india/ .( last visited May. 31, 2017)

Acquisition as defined earlier, is a process in which a firm secures controlling interest in
other firm. It can either be friendly or hostile. A friendly acquisition occurs where the
management of the target company sells its shares to another group at its accord in an
harmonious manner. A takeover occurs when acquiring company makes a bid in an effort to
assume control of a target company, often by taking a majority stake in the target firm. Once
a company takes over the other, it becomes responsible for all the operations, holdings, debts
of the target company. When the target is a publicly traded company, the acquiring company
makes an offer for all of the target’s outstanding shares. A welcome takeover, like an
acquisition or a merger, basically occurs smoothly due to the reason that both the companies
consider it a positive situation. On the contrary, an unwelcome or hostile takeover can be
quite aggressive as one party is not participating voluntarily. Hence, a takeover that occurs
without permission is known as hostile turnover.
Here the acquiring firm can use hostile or adverse tactics, such as a down rid where it buys a
substantial stake in the target company as soon as the market opens, causing the smaller
company lose control in the business before it realizes what is happening. The management
and the board of directors of the target company may withstand takeover attempts by
applying tactics such as a poison pill, which permits the target’s shareholders purchase more
shares at a discount to dilute the acquirer’s holdings and make a takeover more expensive.2
There is another category which is called as bailout takeover. Here, the company that is
financially weak is bailed out to a strong company with the interference of a bank or a
financial institution.

11.4.1 The principal motive/ causes of takeover are discussed below:

11.4.1.1 Assets at Discount:

In this process, the offeror can acquire the assets/shares of a target company at a value less
than the value where offeror or shareholders place upon them. It is generally referred by
financial journalists as “acquiring assets at a discount”. The situations in which assets may be
available at discount are:

a) Where the target has not put its assets to their most efficient use;
b) Where its directors are unaware of the true value of its assets;
c) When it has an inefficient capital structure;

2Will Kenton, Takeover, Investopedia.com https://www.investopedia.com/terms/t/takeover.asp#ixzz5Vgpzc1l4.

d) Where it has followed a policy of limited distribution of dividends;
e) Where the shares have a poor market rating relative to its real prospects; or
f) Where due to any other non-economic reasons, the shares of the target are trading at

low prices.

11.4.1.2 Earnings at Discount: By the process of takeover, the target company can acquire
the right to its earning at a multiple lower than the market places on the offeror’s own profits.
This is known as acquiring “earnings at a discount”.

11.4.1.3 Trade Advantage: When the two companies are brought under a single head, there
is an added advantage of trading which results in producing greater or more earnings per
share. In this competitive era, it is a pre-requisite for the companies to have a critical mass to
be able to sustain and prosper in their work. This can be achieved either through a ‘horizontal
takeover’ or a ‘vertical takeover’3.
(IV) Method of Market Entry: It becomes an attractive mode to enter into market on a large
scale for both the companies especially for the acquiring company.
(V) Increasing the Capital of the Offeror: The offeror has particular reasons to increase its
capital base. These include the acquisition of a company a large proportion of whose assets
are liquid or easily realisable instead of making a rights issue and the acquisition of a
company with high asset backing by a company whose market capitalisation includes a large
amount of goodwill.

11.4.2 Defending Against a Takeover

There are some target companies that have some a stratagem in order to avert a hostile
takeover. The companies that are undervalued are more prone to hostile takeovers because
majority of the shares are held by the public. And thus by acquiring all or majority of the
shares of the target company, the acquiring company is able to get the possession of
ownership of the target company. A preventive step for a company is to buy substantial
portion its own shares which further avoid the acquiring company from purchasing the shares
and becoming a majority shareholder. A lawsuit of antitrust can also be filed against the
acquiring company by the target company in order to defend itself from takeover, or it has an

3Charles V. Bagli, The Civilized Hostile Takeover: New Breed of Wolf at Corporate Door, The New York
Times, <http//:www.stern.nyu.edu/adamodar/New_Home_ Page/invmgmt/ch15/hostile.htm> (last visited Mar.
19,1997)

option of restructuring its assets and liabilities to prevent another company from taking
advantage of takeover4.
11.4.3 Governance of Takeover and Acquisition
There have been noticeable regulatory changes in the trend of takeovers and acquisitions in
2011 when the new Takeover regulations came into force. The new regulations were formed
specially to govern the public listed companies in India. There is a basic difference of the
principles in the case of takeovers and acquisitions. In the instance of takeover, compliance
of both the takeover code as well as that of the Act is necessary whereas in the instance of
acquisition, compliance of only the Act is required. When acquisition becomes a takeover,
the provisions of the SEBI Takeover code 2011 become applicable. Likewise, if an
acquisition results in a combination, the Competition Act, 2002 becomes pertinent and the
approval of the CCI is required. Further, if there is either inflow or outflow of funds to or rom
India, as a result of acquisition, FEMA 1999 would be applied.
Apart from the Companies Act, the major Act i.e. SEBI Act, 1992 governs corporate
activities. Also on the basis of the type of company i.e. public or private, they are governed.
So takeover can be classified as per the type of company and whether or not it is listed.

The companies that are not listed are governed by the provisions of the Companies Act
whereas the public listed companies are regulated by the SEBI to ensure that interests of the
investors are not adversely affected. Under the Companies Act 1956, section 395 dealt with
the takeover/acquisition of shares of unlisted companies, which provided for both power as
well as duty of the acquiring company to preserve shares of the target company. Similar
provisions have been given under the section 235 and 236 of the Companies Act, 2013. There
is a unique feature in Section 236 that provides for purchase of minority shareholding, if the
acquiring company becomes registered holder of the ninety percent of the issued equity share

4Rose Johnson, Takeover v. Acquisition, https://smallbusiness.chron.com/takeover-vs-acquisition-32510.html.

capital of the company. In the case of takeover of the listed companies other than SAST
Regulations, compliance to the listing agreement is also observed. A chief regulation which
governs the acquisition or takeover transaction of public companies is the SEBI (Substantial
Acquisition of Shares and Takeovers) Regulation 2011. These rules have been revised in
accordance with the needs of the business world.
India has experienced only a handful of hostile takeover attempts. Although earlier such
takeover attempts were seen mainly for small firms, it is now employed for large corporations
as well, involving multi-billion dollar deals. The foremost attempt to make a hostile takeover
in India was done by Swaraj Paul wherein he tried to takeover Escorts Ltd. and DCM Ltd in
1980s. Another example of hostile turnover is of the Great Offshore – Bharati shipyard and
ABG shipyard. Promoter Vijay Kantilal Sheth pledged 14.9% in Great Offshore out of his
total holding of 15.8% with Bharati Shipyard for Rs. 200 crores when it was worth Rs.138
crores. Financial downturn hit hard and Sheth lost control to Bharati Shipyard. In 2006, when
he strived for the hive off of Great offshore from GE Shipping nothing would have suggested
this consequence. But the twist was not to end here. Even as Bharati acquired 14.9% ABG
came in the fray for acquiring Great offshore. Great offshore manufactures oil rigs and both
the companies have a strategic interest so neither of them will let go. Hostile Takeover turned
into a bidding war!!! This one should go a long way with ABG having backed up by Ruias
and Bharati already having a higher stake. Current Status – a 30% increase in open offer price
to Rs.450 by ABG bodes well for public shareholders. ABG holds 7.3% and Bharati 19.5%.5

11.5 Emergence of SEBI regulations

There was a requirement that was felt after the introduction of LPG model in 1991 that
necessitated the Indian corporate sector to indulge in various cross border activities. This
model allowed the Indian economy to interact with the foreign investors and the companies
had an opportunity to restructure themselves through the process of mergers or acquisitions.
It was requisite to have a code that could incorporate the principles of corporate democracy,
fairness, transparency and equal opportunity to all. Subsuming all such goals, the Takeover
Regulations 1994 were enacted by SEBI and they were further revised in year 1997. With the
changing scenario of corporate sphere, new regulations were formed by SEBI in order to

5 M&A Restructuring, Hostile Takeover, Aug 2009, http://huconsultancy.com/hostile-takeover/.

govern the mergers and acquisitions in 2009, under the supervision of Mr. Achuthan, widely
known as the TRAC (Takeover Regulations Advisory Committee) to observe the challenges
and ambiguity in the Takeover Regulations 1997. The Achuthan committee proposed some
changes in the 1997 Regulations. Thus, the Takeover Regulations were replaced by the new
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

11.6 Antitrust laws pertaining to mergers
Antitrust law is also referred as “competition law”, which is made in order to preserve the
interest of the consumers from acquisitive business practices by ensuring that there subsists a
just and fair competition in an open-market economy. These laws have evolved along with
the market, vigilantly guarding against would-be monopolies and disruptions to the
productive ebb and flow of competition. Thus it is that body of law that seeks to discourage
concentration of corporate power and also curbs anti-competitive practices in the market.
Anti-competitive practices include cartels, creating abusive monopolies, predatory pricing,
collusive tendering, exclusive market sharing agreements, bid rigging, etc. There is a belief
that larger companies in order to expand their business, may restrain the trade of competitors,
which may have adverse impact on the smaller competitors, hence Antitrust policies focus
more on M&A. They result in lower prices for goods and services, better service quality,
wider choice for consumers, stimulation of innovation and more importantly, efficiency in the
allocation of resources. 6

The Monopolies and Restrictive Trade Practices Act, 1969, was replaced by the Competition
Act, 2002. This act now primarily covers

i. Anti-competitive agreements(Section 3)
ii. Abuse of dominance (Section 4), and
iii. Combinations (Section 5,6,20,29,30 & 31)

The Competition Commission of India (Procedure in regard to the transaction of business
relating to combinations) Regulations, 2011 (“Combination Regulations”) govern the
manner in which the Competition Commission of India (CCI) will regulate combinations that

6Appiah Kusi Adomako, Mergers and acquisitions in the absence of Antitrust Law,
https://www.graphic.com.gh/features/opinion/mergers-and-acquisitions-in-the-absence-of-antitrust-law.html.
(last visited Nov. 28, 2017)

have caused or are likely to cause an appreciable adverse effect on competition (“AAEC”) in
India.

11.6.1 Prohibitions under the Competition Act

Any business arrangement that can form a nexus within the chain of supply, storage,
acquisition, distribution, control of goods is prohibited under the Competition Act.
Though in Indian law, ‘dominance’ is not proscribed; its abuse through price manipulation,
exploitation, or exclusion is forbidden. An establishment has a dominant position if it can
influence competitors or consumers to its advantage.
Thus, the competition Act assures that no business unit misuses its authoritative position in a
market through the control of supply, manipulation of purchase prices, or adapting practices
that deny market access to other competing firms.

11.6.2 Mergers and Acquisition examination categories
While examining a merger, antitrust regulators accentuate on the following questions-

• Will the merger result in a horizontal and/or vertical integration(related to structure)
and

• Will it enable collusion and/or exclusion (related to practice)
Horizontal integration is defined as an acquisition of or an alliance with a competitor and
may lead to monopolistic or oligopolistic market situation whereas vertical integration means
acquisition of suppliers. This collaboration among companies results at a price fixation at a
higher level instead of mutual competition. Hence, exclusion is a way to prevent entry or
growth of a competitor by methods such as tying or exclusive dealing. These four concepts
related to structure and practice form a kind of antitrust. 7

11.6.3 Mode in which it affects entry in India
A foreign company, in order to enter into India through acquisition and merger, will have to
comply with the country’s competition laws. Assets and turnover that will have a particular
monetary value will come within the ambit of the Competition Commission of India (CCI).
For any form of merger or acquisition that may come up, the approval of CCI is required
within 30 days of proposal to bring a new business unit, before it can become actionable. In

7 Antitrust Laws Pertaining To Mergers And Acquisitions, Law Teacher, https://www.lawteacher.net/free-law-
essays/commercial-law/antitrust-laws-pertaining-to-mergers-and-acquisitions-commercial-law-
essay.php?vref=1. (last visited Nov 2013)

the instance of a merger, both the parties have to jointly seek approval of the CCI whereas in
the case of acquisition, the acquiring firm is accountable for securing the proposal. Though in
the situation of a hostile takeover, the acquiring firm only needs to provide the CCI with the
information that is available with them. The latter will then apprise the other parties involved
to furnish more information, as required. However, Joint Ventures are exempted from
seeking approval if the assets shared are not over the authorised limits in India.

11.6.4 Does it affect companies operating outside India?
The authority to appraise the organizations on any competitor that may negatively influence
competition in Indian domestic market lies with the CCI. Also it has the authority penalize or
shut down the operations for any kind of breach of the Competition Act or international cartel
activity that may cause the exploitation of prices or markets across India. A lot of MoUs have
been signed between CCI and the representative bodies of other countries to preserve these
laws at the international level. The law also applies to foreign companies merging with or
acquiring other international companies that have a stake in any Indian company. If, through
this merger or acquisition, the parent company falls under any of the threshold categories
mentioned in the Competition Act (see table), CCI approval must be procured for the M&A
activity to continue.

11.6.5 Compliance under the Competition Act
The competition regulator in India is the Competition Commission of India and it acts as an
anti-trust watchdog for smaller organizations that are not capable to combat against large
companies.

If an enterprise is found guilty of violating the said Act, the CCI can impose a fine that is up
to 10 percent of the average turnover of the preceding three years. In instances of cartel
arrangements, it may extend to more than 10 percent and up to 3 times the profit made
through the entire period of the said arrangement. In year 2018, CCI found Google violating
the competition laws by abusing its dominant position and ordered the Silicon Valley
company to pay Rs. 136 Crores (US$20 million) for monopolizing the market, which is a
direct example of why the international companies working in India need to strictly follow
the country’s competition laws and the repercussions of non-compliance.

Also if any company rebuffs to cooperate with an ongoing investigation, CCI can levy fine on
it. In November 2017, the CCI held Monsanto and three of its units liable for breach of the

Competition Act and levied a fine of Rs 2 crores (US$300,000) for being unable to provide
the requisite information when CCI demanded it. Thus it can be easily manifested how anti-
trust regulations prevent large corporations from gaining undue advantage in the Indian
market, and seeks to preserve the interests of small enterprises.

A very famous example on anti-trust laws is of Microsoft. When it started linking its
Microsoft Internet Explorer with Microsoft Windows products, it ran afoul of the law.
Though there were other options also prevailing in the market such as Macintosh Apple. And
it was not mandatory for the consumers to purchase Microsoft products and had a right to
refuse it. Still Microsoft was held liable under the anti-competition laws and it realised a fall
in the market value of $70 billion.

Therefore, the antitrust laws are a place to protect the consumers and small businesses.
However, there is a belief among economists that these laws simply act as an impediment in
the working of corporations that are really doing well. Companies are also subject to legal
interpretation when they are accused of antitrust behaviour. Also some corporations are
considered natural monopolies and are empowered to operate with immunity. Instead they are
regulated by heavy government regulation to prevent price gouging.

11.6.6 Key Takeaways

In defiance of the current competitive antitrust climate, companies take some precautionary
measures in order to reduce the risk of investigations or challenges that may arise and lead to
retard the process of merger or acquisition.

11.6.6.1 Set realistic timelines-Another benefit of doing an antitrust analysis is that
this can inform the business team in developing a realistic closing timeline. If the deal
is not reportable, the parties should still get comfortable that it is unlikely to attract
antitrust scrutiny pre-closing.
11.6.6.2 Be careful while creating documents- Internal business documents like
emails of the transacting parties carry a substantial weight in an antitrust analysis.
Government agencies and courts believe that the best predictor of a merger’s likely
impact on competition is the views of the merging parties themselves expressed in
their own documents. Companies therefore should be sensitive to the implications that
the content and phrasing of the business documents may have for both current and

future and transactions. Business personnel should take basic precautions to avoid
creating documents that convey misleading and inaccurate impressions or that suggest
an anticompetitive motive for, or likely competitive impact from a proposed
transaction.
11.6.6.3 Be prepared- If the parties are vigilant while indulging in the activity of
M&A irrespective of the size of the deal, they can go ahead with the process avoiding
all the negative repercussions and they will be able to rule out the trivial antitrust
issues that may arise with minimal expense and in less time.
11.6.6.4 Do not forget customers- Apart from the obvious reason from keeping the
customers informed about a transaction and educating them on the benefits, good
antitrust reasons are present for doing so. Customer complaints to antitrust agency
often carry significant weight and may lead to enhanced and prolonged scrutiny. They
are also a common means by which agency learn of non-reportable acquisitions.
11.6.6.5 Pay attention to antitrust language in contract- Many M&A agreements
contain antitrust- related provisions, such as antitrust-specific representations and
warranties, conduct of business covenants, cooperation provisions, risk-shifting
covenants, conditions precedent to closing and antitrust breakup fees. These
provisions can be critical in allocating antitrust risk between buyer and seller and in
defining each party’s role in the antitrust process, so they should be given due
attention. 8

11.7 Conclusion

In this age of cut throat competition, every business wants to emerge expeditiously and as a
consequence of which they try to eliminate the competitors by using destructive practices.
With the emergence of globalisation process the interactions of the corporations have reached
to another level. They strive to be more efficient and profitable through mergers and
acquisitions in order to expand their market share and rise globally. But all these practices
may in some way harm the interests of the smaller business units and also the consumers.

8Daniel E Hamli, Jacqueline R Java, Rebekah T Scherr, Beating the competition: Antitrust issues in Mergers
and Acquisitions, https://bracewell.com/sites/default/files/assets/RT-871-0516_ePrintFinal.pdf. (last visited
May 2016)

Therefore some rules and regulations have been formed in order to safeguard the interests of
various parties. The takeover code 2011 reflects such a change which has tried to meet the
interests of shareholders as well as promoters. The Code yields various unique features which
were not there in the previous Code such as exit opportunities for public shareholders, raising
the threshold for making an open offer from fifteen percent to twenty five percent, indirect
acquisition, amended list of exemptions and many more. The listed public companies have to
adhere to the requirements given under the code else it would lead to delisting of the shares
of such companies. Such strict compliance of the regulations is necessary to ensure that
investors are protected from the adverse effects which takeovers, especially hostile takeover,
may create on their interests. The Takeover Code 2011 focuses on the principles of corporate
democracy, transparency, fairness and ensuring the interests of investors.
Antitrust issues are cardinal in many mergers and acquisitions especially those that involve
candidate companies of significant size especially if they have operations across multiple
jurisdictions. The interested parties must take into account from early on, the time that would
likely be consumed in obtaining the necessary consents, their costs and from how many
regulatory agencies. If the instructions analysing the mergers are made lucid and the
procedures are for receiving the consent are properly furnished to the parties, any kind of
inconvenience can be curtailed that will further permit the parties to emphasise on other
prominent areas in the deal.