MODULE_1 (3)

MERGERS &
ACQUISITIONS

CERTIFICATE COURSE

DEVELOPED BY
Corp Comm Legal

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MODULE - 1

MERGERS & ACQUISITIONS

1.1 INTRODUCTION

Sir Milton Friedman, an economist who won the Mergers and Acquisitions are complicated processes
Nobel Prize for his research in Economics, came up which, inter alia, require-
with the theory that the basic purpose behind every
business operation is to maximize the profits of its ➢ Preparation
shareholders. ➢ Analysis
Mergers and Acquisitions are nothing but means of ➢ Investigation
consolidating enterprises to grow as a single business ➢ Deliberation
entity which is stronger, and more efficient in
maximizing the profits of its shareholders. The There are a lot of internal and external parties who
fundamental principle here is that 2 + 2 = 5, i.e., two might be affected by a merger or an acquisition, like:
companies share a greater value when they come
together compared to when they operate ➢ Promoters
individually. These options look more tempting when ➢ Government agencies
one of the companies operates sub - optimally below ➢ Bankers
its potential. In such cases, the company with the ➢ Workers
stronger foundation and superior financial resources ➢ Professional managers of the companies
merges with or acquires the other company
(operating below its potential) to create a company involved.
which has a better competitive advantage and an
increased share value. At the same time, the target Before a deal is finalized, interests of all such parties
company usually doesn’t resist very much as it require consideration, and their concerns should be
realises the difficulty in surviving alone. addressed, so that any possible hurdles can be
avoided.

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1.2 HISTORY

For a long time, companies and businesses in India Escorts Ltd. In addition to that, numerous Non –
were hesitant to come together to carry on business. Resident Indians tried to gain control over different
This is because they were governed by, oppressive companies by means of their stock exchange
and undesirably restrictive, rules and procedures laid portfolios.
down by the Monopolistic and Restrictive Trade
Practices Act, 1969. This legislation was far-reaching The value of mergers and acquisitions involving
and acted as a deterrent for M&A activities and a Indian companies more than doubled in the first nine
significant cause for very less number of businesses months of 2018 to a shade below the $100 billion
joining hands together. mark.i

But this changed in the year 1988, when India Today, with the globalization of businesses and the
witnessed one of its oldest significant company growing competition, the scenario has changed a lot.
mergers or business acquisition. It was the hostile In fact, India is believed to be among the top countries
takeover by Swaraj Paul to subjugate DCM Ltd. and that have entered into mergers and acquisitions
mode.ii

1.3 MERGERS

When the board of directors of two companies decide expand into new territories and acquire more market
to come together and amalgamate their companies share till the time the product lines of both the
and vote in its favour, the two companies are said to companies unite.
have decided to merge together. After the process of
merger, the acquired company ceases to have a Significance of a merger-
distinct entity and becomes part of the company
acquiring it. More often than not, a merger is used to

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➢ It can present a remarkable opportunity to a The key to a successful merger lies in finding the right
business entity which aspires to grow and company to acquire which has the following
become more successful. characteristics-

➢ When a company decides to sell itself, it is ➢ Sizable business good market share
best available option for the company to find ➢ Good client list
another company which has deep pockets and ➢ Good distribution network
has the willingness to acquire it. ➢ Good order book, technology, efficient

➢ The acquired company will be successful in employees etc.
surviving by becoming a subsidiary of the
acquiring company. Also, for a merger to succeed, it must be a win – win
situation for both the companies. For this purpose,
➢ Helps companies look for an exclusive one or more of the companies might be required to-
product or a strong distribution channel or a
unique quality which is not available ➢ Clean up its balance sheets
anywhere else due to which the acquiring ➢ Remove poorly performing products
company might be forced to pay a premium ➢ End insider deals
price. ➢ Shorten unrestricted fringe benefits
➢ Clear all tax defaults etc.

1.4 TYPES OF MERGERS

Mergers can be divided into different kinds, which Brooke bond and Bank of Mathura with ICICI
are- Bank.
2. Vertical merger- When both the companies
1. Horizontal merger- When the acquiring are involved in the same line of production
company and the acquired company operate but at different stages. For instance, Reliance
in the same line of business or are and FLAG Telecom group.
competitors. For example, Lipton India &

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3. Reverse merger- when a parent company 4. Conglomerate merger- When both the
merges into a subsidiary, or a profit-making
firm merge into a loss-making one. For companies operate in completely different
example, when Godrej Soaps Ltd. merged
with Gujarat Godrej Innovative Chemicals lines of business. This kind of merger takes
Ltd.
place to diversify and spread the risks, in case

the current business does not yield adequate

profits. Example, L&T and Voltas Ltd.

1.5 ACQUISITIONS

An acquisition can be considered as a corporate increased synergy, cost reductions, or new
action through which an entity buys most of the niche offerings.
ownership stakes of another entity to have a control ➢ To grow their operations to another country,
on it. An acquisition happens when a buying company purchasing an existing company might be the
obtains more than 50% ownership in a target right approach to enter a remote market
company. As a major aspect of the trade, the rather than starting afresh.
acquiring organization frequently buys the target ➢ The purchased business will as of now have
company's stock and other resources, which permits its own workforce (both labour and
the acquiring organization to settle on choices in management), a brand name and other
regards to the recently gained resources without the intangible resources, guaranteeing that the
approval of the target company's stakeholders. acquiring company will start off with a
Acquisitions can be paid for in cash, in the acquiring decent client base.
company's stock or a blend of both. ➢ Acquisitions are often made as part of a
company's growth strategy when it is more
Companies perform acquisitions for various reasons- beneficial to take over an existing firm's
operations than it is to expanding on its own.
➢ They may be seeking to achieve economies It makes difficult for large companies to keep
of scale, greater market share, growing without losing efficiencyiii.

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➢ At a point when an industry draws in ➢ Research and development might be
numerous competitors or when the supply excessively troublesome or take too much
from existing firms increase excessively, time, so the company offers to purchase the
organizations may look to acquisitions as an current resources of an organization that has
approach to reduce excess capacity, officially experienced that process.
neutralize the opposition, or concentrate on
the most productive suppliers.

➢ On the off chance that another innovation
emerges, that could build profitability; an
organization may decide that it is more cost-
efficient to buy a contender that has already
acquired the technology.

1.6 TYPES OF ACQUISITIONS

Acquisitions can be either strategies to guarantee that the acquiring
company buys the suitable resources,
➢ Friendly or including the financial statements and
➢ Hostile. different valuations, and that the purchase
accounts for any obligations that may
Friendly acquisitions take place when the target accompany the benefits. Once both the
company communicates its consent to be acquired. companies consent to the terms and meet any
Hostile acquisitions don't have a similar legal stipulations, the purchase moves
understanding from the target firm, and the acquiring forward.
company should effectively buy substantial stakes of ➢ Unfriendly acquisitions, more commonly
the target organization to gain a majority. referred to as hostile takeovers, occur when
the target company does not consent to the
➢ Friendly acquisitions regularly work towards acquisition. The acquiring company must
a shared advantage for both the acquiring and gather a majority stake to force the
the target companies. The companies create

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acquisition. To acquire the same, the
acquiring company can produce a tender
offer to encourage current shareholders to
sell their holdings in exchange for an above-
market value price.

1.7 DIFFERENT METHODS OF COMBINING
BUSINESS

There are several methods for combining businesses A consolidation is a combination of two or more
other than Mergers and Acquisition. Hereafter, the companies in which an entirely new company is
term ‘acquisitions’ will refer to any type of business
combination. formed and all merging companies cease to exist.
New company’s shares are exchanged for the
1. Consolidation- merging company’s shares. It is preferential for two
similar sized companies to consolidate rather than
A consolidation is a mix of at least two organizations merge. The terms are often used interchangeably,
whereby a completely new corporation is shaped and with either used to refer generally to a joining of the
every consolidating organization ceases to exist. assets and liabilities of two companiesiv.
Shares of the new organization are traded for those
of the merging ones. Two similar sized organizations 2. Leveraged Buyout-
for the most part consolidate as opposed to merging.
Despite the fact that the refinement amongst merger A leveraged buyout (LBO) is a sort of acquisition that
and consolidation is important, the terms are happens when a group of investors, led by the
regularly utilized interchangeably, with either used to administration of a company (management buyout or
allude by and large to the joining of the assets and MBO), obtains funds to buy the organization. The
liabilities of two companies. assets and future earnings of the organization are
utilized to secure the finances required to buy the

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company. At times employees are permitted to take layers of subsidiaries beyond such numbers as may
part through an employee stock ownership plan, be prescribed.vi
which may provide tax advantages and improve
employee productivity by giving employees an equity A holding company that takes part in the
stake in the company. administration of the subsidiaries is known as a
parent company.
3. Holding Company-
4. Tender Offer-
A holding company is a company that claims adequate
voting stock to have a controlling interest for at least In a tender offer, one organization offers to buy the
one organization called subsidiaries. A outstanding stock of the other at a particular cost.
subsidiary company is an incorporated entity which The acquiring company conveys the offer directly to
has an identity of its own, which shall be separate the other company's shareholders, bypassing the
from its holding companyv. Under the Companies Act, administration and board of directors of the latter.
2013 a subsidiary company is defined as,
Example: On 9th October 2014, the high-profile
“Subsidiary company” or “Subsidiary”, in relation to investor Carl. C. Icahn had written an open letter to
any other company (that is to say the holding Tim Cook, the Apple, Inc. CEO urging him for a tender
company), means a company in which the holding offer stating that the company, despite having done a
company – wonderful job in the market, remained undervalued
in the stock market.vii
(i) Controls the composition of the Board of
Directors; or While the acquiring company may continue to exist,
most tender offers result in mergers especially when
(ii) Exercises or controls more than one-half of the there are certain dissenting shareholders.
total share capital either at its own or together with
one or more of its subsidiary companies: 5. Divestitures-

Provided that such class or classes of holding While divestitures don't represent a business
companies as may be prescribed shall not have combination, they are a method for encouraging the
acquisition of a part of an organization. Divestitures

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can also be utilized by companies as a way to enhance stock in the two companies. One of these
profit and shareholder value, or as a means for raising companies- Lucent Technologies which was
capital. A divestiture includes the offer of a portion of an equipment producer and research
an organization. Two prominent methods for company was spun-off to avoid conflicts with
divestiture are- customers of other AT&T products. The other
company NCR- a computer company was
➢ Spin-off- where a company distributes all of spun-off to remove the effects of a poor-
its shares in a subsidiary to the company's performing business from AT&T's results.
shareholders as a tax-free exchange. A
leading example of spin-off is AT&T. AT&T ➢ Equity carve-out- it is similar to a spin-off. It
was reorganized into three separate publicly occurs when a company sells some of its
traded corporations. What remained was shares in a subsidiary to the publicviii. This
AT&T which consisted of long distance and raises additional capital for the company.ix
wireless phone businesses, a credit card
business, and two other companies that were
spun off to shareholders who were given

1.8 MOTIVES FOR MERGERS & ACQUISITIONS

➢ Synergy- cooperative synergy from mergers and acquisitions is
assessed before the decision is made.
The fundamental thought process behind a merger or
acquisition is to enhance the organization's ➢ Growth-
effectiveness for its investors through collaboration,
which is an idea that expresses that the esteem and Mergers or acquisitions can exponentially contribute
execution of two combined entities will be more to the growth of an organization, as it has more
prominent than the aggregate of the different resources available at its disposal. At the point when
individual parts. This is the reason why potential two organizations combine their skills and resources,

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their assets and market shares are also combined, organization or a merger could encourage a
which provides a greater opportunity for growth in monopoly- like situation, which would give the
the market. The market share which was shared by company an edge over its rivals. Then again, a merger
two organizations will now solely belong to one should be possible with a rationale to control the
company. The increased market control will produce supply of certain raw materials which will give the
more opportunities for sales, revenue and company a favourable position over other
profitability. organizations.

➢ Acquiring Unique Capabilities- ➢ As an Answer to Government Policies-

Sometimes, mergers and acquisitions take place to Mergers and acquisitions also take place to adapt to
secure unique capabilities or assets, which could unfavourable government policies, which may
change the outlook of company. This would include require a specific size of a firm to exist. Few
licenses and patents, which the acquiring governments offer tax reductions and different
organization will access once the merger is complete. motivators to companies of a particular size and
A patent, permit or certain technology could have a scale, which support mergers as more profit can be
considerable effect on the organization, which could made as tax liability is lower. Keeping in mind the end
help it significantly increase sales and profits, since it goal to manage governmental pressure to survival
may create a substantially impressive / unique inside an industry, organizations mergers and
business model for the new company. At this point, acquisitions have a greater impact on government
when two unique organizations merge, it could policies.
unlock hidden values, which may become useful
resources in improving the efficiency of the new ➢ Transfer of Technology-
company.
Another explanation behind mergers and
➢ Exploiting the Market- acquisitions is the exchange of innovative
technology, particularly for exceptionally specific
Market frameworks in most economies are not organizations with unique advancements.
perfect, which implies that there is scope for Companies purchase different organizations trying
organizations to misuse these imperfections to their to get a specific technology which is patented and/or
own benefit. Assuming control over another extraordinary. In this way, these technologies are

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utilized to improve products/ services, and thus an approach to bootstrap earnings, thus better
providing a more prominent piece of the pie. execution at the stock trade for listed companies.

➢ To Handle Large Clients- ➢ Diversification-

Mergers and acquisitions, particularly in the Mergers and acquisitions enable organizations to
administration business, take place with a specific enhance into different zones of business, spreading
end goal to take after major customers. There are a wings and opening door for more deals, benefits and
lot of cases of such Mergers and Acquisitions acknowledgment in the market. For instance, if a
occurring for law offices, when the clients are so garments store converges with a textile company, it
enormous, it forces firms to merge keeping in mind would help the two organizations, since they would
the end goal to serve them better. The consolidated have the capacity to keep a more prominent edge of
firms have more resources and ability to deal with benefit. Diversification can likewise occur in
significant clients. It additionally gives organizations extremely different industries.

1.9 DIFFERENT PHASES OF ANY MERGERS &
ACQUISITIONS

Phase 1: Pre-acquisition review- The first and a detailed analysis of the target company needs to be
foremost step towards M&A is self-assessment of the done with due diligence.
acquiring company i.e. to look whether there is a need
for M&A and ascertaining the valuation and chalking Phase 4: Acquire the target through negotiations-
out the growth plan through the target. The next step is initiating negotiations to come to a
consensus for a negotiated merger or a bear hug.
Phase 2: Search target companies- The second step
involves searching the possible takeover candidate. Phase 5: Post- merger integration- If all the above
steps fall in place, the last step involves a formal
Phase 3: Valuation and investigation of the announcement of the agreement of merger by both
target- After the appropriate company is shortlisted,

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the participating companies.x The actual integration
process follows this.

Mergers and Acquisitions are regarded as some of
the most important or essential elements of any
business. In this dynamic environment, a business
must not only learn to adapt quickly but must also be
extremely innovative to survive. Therefore, for any
business to grow, a merger or acquisition becomes a
significant business strategy. Although, it is an
extremely complex process, if done right, it usually
leads to positive results benefiting all the parties
involved.

i ‘M & A poised to cross $100 billion- mark in 2018’, http://pages.stern.nyu.edu/~igiddy/articles/mergers_intro.htm
livemint,
https://www.livemint.com/Companies/IuQ7k4nI4GKgNdHG (last visited Nov. 11, 2018) (hereinafter called Ian Giddy).
XAL2WN/MAs-poised-to-cross-100-billionmark-in- v Aditya Shah, Taking Care of Children: Companies Act
2018.html accessed on 25 November 2018.
iiAjay Gehi, History Of Mergers And Imposes Obligations Pertaining to Subsidiaries, Taxguru.in
Acquisitionhttp://www.mergersandacquisitions.in/history-of-
merger-and-acquisition-in-india.htm https://taxguru.in/company-law/care-children-companies-act-
iii Deepesh Kumar, Project Work of Investment and Securities
Law Acquisition of Shares, Academia.edu, imposes-obligations-pertaining-subsidiaries.html (last visited
http://www.academia.edu/35283158/PROJECT_WORK_OF_
INVESTMENT_AND_SECURITIES_LAW_ACQUISITION on Nov. 11, 2018).
_OF_SHARES viCompanies Act, 2013, Section 2(87).
iv Ian Giddy, Mergers and Acquisitions: An Introduction, vii ‘Tender Offer: An introduction to its meaning with
Giddy.org, examples’, WealthHow, https://wealthhow.com/tender-offer-

meaning-examples accessed on 25 November 2018.
viii Ian Giddy, supra note 8.
ix Id.
xEduPristine, Mergers, (Aug.28, 2017, 8.03 PM),

http://www.edupristine.com/blog/mergers-acquisitions.

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