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Merger and Acquisition
By Naveen. Rohatgi
CA.CS.ICWA.MBA
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Acquisiont (Absorbtion) : When one company takes over
another and clearly established itself as the new owner, the
purchase is called an acquisition.
AbsorptionThis type of merger involves fusion of a small company with alarge company. After the merger the smaller company ceases toexist.
Example:The merger of Bank of Rajasthan with ICICI Bank.After Merger the Bank of Rajasthan ceases to exist. The mergerof Oriental Bank of Commerce with Global Trust Bank. Afterthe merger, GTB ceased to exist while the Oriental Bank of
Commerce expanded and continued.
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Merger (Amalgamation)
This type of merger involves fusion of two or more companies.After the amalgamation, the two companies lose their
individual identity and a new company comes into existence. Anew firm that is hitherto, not in existence comes into being.This form is generally applied to combinations of firms of equalsize.
Example:The merger of Brooke Bond India Ltd., with LiptonIndia Ltd., resulted in the formation of a new company BrookeBond Lipton India Ltd.
Daimler-Benz and Chrysler ceased to exist when the two firms
merged, and a new company, DaimlerChrysler, was created.
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Purchase consideration :
Purchase consideration is the amount which is paid by thetransferee company for the purchase of the business of the
transferor company. In other words consideration foramalgamation means the aggregate of the shares and othersecurities issued and payment in cash or other assets by thetransferee company to the shareholders of the transferor
company.
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Take over :A take over generally involves acquisition ofcertain equity capital which enables the acquirer toexercise control over the affairs of the company. Example
United breweries acquired majority stake in Deccanaviation Ltd. Mahindra Telecom takeover of Satyam. Otherexample are Indal by Hindalco, IPCL by Relianceindustries, VSNL by Tatas, Balco by Sterlite. In theory the
acquirer must buy more than 50% of the paid up capital ofthe acquired company to enjoy complete control. Inpractice however effective control can exercised by holdingbetween 20% to 40%. Since the remaining shareholdersare small and scattered. Takeover can be hostile takeoveror friendly takeover
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ASSET ACQUISITION
Asset acquisitions involve buying the assets of anothercompany. These assets may be tangible assets like a
manufacturing unit or intangible assets like brands. In suchacquisitions, the acquirer company can limit its acquisitions tothose parts of the firm that coincide with the acquirers needs.
Example:The acquisition of the cement division of Tata Steelby Laffarge of France. Laffarge acquired only the 1.7 milliontonne cement plant and its related assets from Tata Steel.
The asset being purchased may also be intangible in nature.
For example, Coca Cola paid Rs.170 crore to Parle to acquire itssoft drinks brands like Thums Up, Limca, Gold Spot, etc.Acquistion of brands like Lakme by HLL is an example of assetacquisition. Corn products India acquired Captain Cook. Smith
line Beecham acquired the crocin brand.
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Types of Merger
Horizontal Merger
A horizontal merger involves a merger between two firms
operating and competing in the same kind of businessactivity. The main purpose of such mergers is to obtaineconomies of scale of production. The economies of scaleis obtained by the elimination of duplication of facilitiesand operations and broadening the product line,reduction in investment in working capital, elimination ofcompetition in a product, reduction in advertising costs,
increase in market share, exercise of better control onmarket, etc.
Horizontal mergers result in decrease in the number offirms in an industry and hence such type of mergers make
it easier for the industry members to join together for.
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monopoly profit
Example:
The merger of Centurion Bank and Bank of Punjab, Oriental
Bank of Commerce and GTB in Banking Sector. A big merger
between Holicim and Gujarat Ambuja Cement Ltd., with
Associated Cement companies is also a merger in the
manufacturing industry. Essar-Hutch and BPLs mobile merger,
VSNLs acquisition of Chennai based Dishnet DSLs Internet
Service Provider (ISP) are some other horizontal mergers that
took place recently.
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Vertical Mergers
A vertical merger involves merger between firms that are indifferent stages of production or value chain. They are
combination of companies that usually have buyer-sellerrelationships. A company involved in a vertical merger usuallyseeks to merge with another company or would like to takeoveranother company mainly to expand its operations by backward
or forward integration. In vertical combination, the mergingcompany would be either a supplier or a buyer using its productas an intermediary material for final production.
Firms integrate vertically between various stages due to reasons
like technological economies, elimination of transaction costs,improved planning for inventory and production,reconciliation of divergent interests of parties to a transaction,etc. Anti-competitive effects have also been observed as both
the motivation and the result of these mergers.
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Examples:Nirmas bid for Gujarat Heavy Chemical (backwardintegration) or Hindalco Bidding for Pennar Aluminium(forward integration). Videocon Groups acquisition of
Thomsons Colour Picture Tube Business in China, RPL andRIL
Conglomerate mergers
Involve merger between firms engaged in unrelated types ofbusiness activity. Philip Morris a tabacco acquired GeneralFoods in 1985 for $ 5.6 billion
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Reverse Merger:
In case of reverse merger, private company may go public bymerging with an already public company that is often inactive.
In India the reverse merger the company opt to take theadvantage of Tax saving (under sec 72 A) so that healthy andprofitable unit is allowed the benefit of set off and carryforward of losses. Godrej soaps merged with loss making
Gujarat Godrej innovative ChemicalsReverse merger can also occur on account of regulatoryenvironment. An example is the reverse merger of ICICI intoICICI Bank. ICICI could be become the universal bank through
reverse merger with its banking subsidiary.
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Leverage Buyout
The acquisition of another company using a significant amount
of borrowed money (bonds or loans) to meet the cost ofacquisition. Often, the assets of the company being acquiredare used as collateral for the loans in addition to the assets ofthe acquiring company. The purpose of leveraged buyouts is to
allow companies to make large acquisitions without having tocommit a lot of capital. In an LBO, there is usually a ratio of90% debt to 10% equity.
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Take over Defenses:
White Knight
If a determined hostile bidder thwarts all defenses, a possible
solution is a white knight, a strategic partner that merges with
the target company to add value and increase market
capitalization. Such a merger can not only deter the raider,
but can also benefit shareholders in the short term, if the
terms are favorable, as well as in the long term if the merger
is a good strategic fit.
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Green mail
A company may also pursue the greenmailoption by buying
back its recently acquired stock from the putative raider at a
higher price in order to avoid a takeover.
Increasing Debt
Increasing debt as a defensive strategy has been deployed in thepast. By increasing debt significantly, companies hope to deter
raiders concerned about repayment after the acquisition.
However, adding a large debt obligation to a company's balance
sheetcan significantly erode stock prices.
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Crown Jewel Defense
In business, when a companyis threatened with takeover, the
crown jewel defenseis a strategy in which the targetcompany sells off its most attractive assetsto a friendly third
party or spin off the valuable assets in a separate entity.
Consequently, the unfriendly bidder is less attracted to the
company assets.
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'Poison Pill'
A strategy used by corporations to discourage hostile
takeovers. With a poison pill, the target company attempts to
make its stock less attractive to the acquirer. There are twotypes of poison pills:
1. A "flip-in" allows existing shareholders (except the
acquirer) to buy more shares at a discount.
2. A "flip-over" allows stockholders to buy the acquirer's
shares at a discounted price after the merger.
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People Pill
This is another defensive strategy adopted to ward off a hostile
takeover. Under this strategy, the management of the targetcompany threatens the acquirer that in the event of a takeover,
the entire management team will resign. This strategy is a
variation of poison pill defense strategy.
N i S k
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Non-voting Stock
Non-voting stock comprises share that provide the
shareholder with very little or no voting rights on issues suchas election of the board or mergers. Such shares are usually
issued to individuals who want to invest in the companys
profitability and success, but are not interested in voting
rights. Preference shares are typically non-voting shares. such
shares help in making the company a closely held company
and act as a takeover defense.