Merger Basics

7/27/2019 Merger Basics

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Merger in Real Estate


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MERGER: The combination or fusion of one thing or rightinto another thing or right of greater or larger importance

so that the lesser thing or right loses its individuality and

becomes identified with the greater whole.

MERGER IN REAL ESTATE

There are 3 interpretations of MERGER in Real Estate


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1

In contract law, agreements are merged when one contract is absorbed into another.

The merger of contracts is generally based on the language of the agreement and the

intent of the parties. The merger of contracts is not the same as a merger clause, which

is a provision in a contract stating that the written terms cannot be varied by prior or

oral agreements.

Real property contract merger doctrines represent property and

deed mergers. These mergers basically state that any agreementsmade in the contract that are not reflected on the deed become

null when the deed is transferred to the buyer. This doctrine typicallyonly applies to covenants of title and may be abrogated to allow certain terms

to survive after the merger.

The doctrine of merger is neither a doctrine of constitutional law nor a doctrine

statutorily recognized. It is a common law doctrine founded on principles of propriety

in the hierarchy of justice delivery system.



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in real property law, when an owner of an interest in property acquires a greater orlesser interest in the same property, the two interests become one.

Examples: a person with a life estate is given the title to the property by inheritance, thelife estate is merged with the titled interest.

Estates affecting ownership of land are merged where a greater estate and a lesser estate

coincide and are held by the same individual.

Another important form of merger occurs when a person acquires two parcels of land

which were once a single lot that had been divided into two lots by a "lot split"

granted by the city or county.

If the minimum lot size has been increased by changes in local ordinances and the two lots

are now sub-standard size, the buyer who acquires title in the two lots may find that theyare "merged" into one lot and he or she has lost the right to build a house on each lot. To

avoid this problem, the buyer should make sure title in each lot is obtained under a

different name, i.e. husband taking one, and wife the other.

2


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In corporate law, the joining together of two corporations in whichone corporation transfers all of its assets to the other, which continues to

exist. In effect one corporation "swallows" the other, but the shareholders

of the swallowed company receive shares of the surviving corporation. A

merger is distinguished from a "consolidation" in which both companies

join together to create a new corporation.

Real estate mergers occur becausefirms with superior management

acquire other firms that possess unexploited opportunities to cut costs

and increase earnings.

.

3


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Growth Strategies

Organic strategies refer to internal growth strategies that focus on growth

by the process of asset replication, exploitation of technology, better

customer relationship, innovation of new technology and products to fill

gaps in the market place. It is a gradual growth process spread over a few

years (Bruner, 2004).

Inorganic growth strategies refer to external growth by takeovers, mergers

and acquisitions. It is fast and allows immediate utilization of acquired

assets. Bruner (2004).


7/21MERGER IN REAL ESTATE

When two companies are

merged or combined, they

must have some objectives

behind this merger.

One motive of merger maybe to realize economies of

scale, improving operative

performance or expanding

the business in order to

gain more assets.

However, on the other themotive may be to create

anti-competitive effects

like to reduce the

numbers of competitors

or to create dominance in

the market.


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A feature of the construction industry in the past five years has been the increase in

corporate activity. This activity is leading to consolidation within the industry.

Aggregates and building firms have been experiencing unprecedented consolidation

as multinationals go in search of geographical presence and economies of scale

(Construction News, 2000).

The motives behind this wave of consolidation, is the fact that financial institutionswant to deal with larger companies, and also the belief that the larger the firm the

greater the efficiency

In microeconomics, economies of scale are the cost advantages that enterprises obtain due to

size, with cost per unit of output generally decreasing with increasing scale as fixed costs are

spread out over more units of output. Often operational efficiency is also greater with

increasing scale, leading to lower variable cost as well.


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The anticipated benefits that a merger or acquisition is expected to generate, one such

benefit is to exploit scale economies. Exploitation of scale economies can occur in any

of3 major ways:

1. A merger could improve cost efficiency by reducing the costs per unit of output.

For example where plant and equipment is of an expensive nature, costs may be

reduced by combined use.

2. Mergers may exploit economies through improvements in profit efficiency. Profitefficiency takes into account the cost and the income or revenue effects. Thus,

profit efficiency can improve after a merger without the actual cost efficiency

improving. If for example the merger increases revenue without increasing or

decreasing costs.

3. Access to capital markets on more favorable terms. An increase in market

concentration or share may allow the consolidated company to raise the rates for

the goods or services provided by the company.



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The findings from the contracting and materials analysis suggests that increasing

company size, either by merger or acquisition can lead to scale economies.

However, the evidence suggests that beyond a certain size the costs benefits appear

to become exhausted.

The reasons for these diseconomies could be due to the difficulties of organizing

effectively an increasingly large and possibly increasingly diversified business.


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TYPES OF MERGERS

It is a merger of two or more companies that compete in the same industry.

It is a merger with a direct competitor and hence expands as the firms

operations in the same industry. Horizontal mergers are designed to produce

substantial economies of scale and result in decrease in the number of

competitors in the industry.

The merger of Tata Oil Mills Ltd. with the Hindustan lever Ltd. was a horizontal

merger.

In case of horizontal merger, the top management of the company being

meted is generally, replaced, by the management of the transferee

company.

One potential repercussion of the horizontal merger is that it may result in

monopolies and restrict the trade.

Horizontal Vertical Co-generic Conglomerate


(+)

(-)


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TYPES OF MERGERS



(+)

(-)

It is a merger which takes place upon the combination of two companies which are

operating in the same industry but at different stages of production or distributionsystem.

If a company takes over its supplier/producers of raw material, then it may result in

backward integration of its activities. On the other hand, Forward integration may

result if a company decides to take over the retailer or Customer Company.

Vertical merger provides a way for total integration to those firms which are striving

for owning of all phases of the production schedule together with the marketing

network (i.e., from the acquisition of raw material to the relating of final products).

Thus, stronger position in the market.

The effect of the merger may be to improve efficiency through improving the flow of

production and reducing stock holding and handling costs.

However, if there is a degree of concentration in the markets of either of the

companies, anti-monopoly problems may arise.


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TYPES OF MERGERS



The acquirer and target companies are related through basic technologies,production processes or markets. The acquired company represents an extension

of product line, market participants or technologies of the acquiring companies.

These mergers represent an outward movement by the acquiring company from

its current set of business to adjoining business. The acquiring company derivesbenefits by exploitation of strategic resources and

Benefit from entry into a related market having higher return than it enjoyed

earlier.

The potential benefit from these mergers is high because these transactions offeropportunities to diversify around a common case of strategic resources.

For example, merger between Hindustan Sanitary ware industries Ltd. and

associated Glass Ltd. is a Product extension merger

(+)

(+)

(+)


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TYPES OF MERGERS



These mergers involve firms engaged in unrelated type of business activities i.e.

not related to each other horizontally nor vertically

In a pure conglomerate, there are no important common factors between the

companies in production, marketing, research and development and technology.

In practice, however, there is some degree of overlap in one or more of this

common factors.

Conglomerate mergers are unification of different kinds of businesses under one

flagship company. The purpose of merger remains utilization of financial

resources and synergy of managerial functions.

The focus of such conglomerate mergers is on how the acquiring firm can improve

its overall stability and use resources in a better way to generate additionalrevenue.

It does not have direct impact on acquisition of monopoly power and is thus

favored through out the world as a means ofdiversification.

(+)

(+)

(+)


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As per the Competition Act 2002, a Combination comprises of any of the following

1. any acquisition of control /shares/ voting rights/ assets of enterprises2. acquiring of control by person over an enterprises, where such person already has

direct / indirect control over another enterprise engaged in similar / competitive

business

3. any merger or amalgamation between enterprises if it exceeds the monetary

threshold of assets and or turnover as under:


Laws and Regulations governing M & A in India


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Suo moto inquiry by (Competition Commission of India) CCI

into anti-competitive agreements and abuse of dominant

position

A Combination cannot come into effect until a period of 210 days has

passed from the day on which the notice was given to CCI or CCI has passed

an order under Section 31 of the Act, whichever is earlier.

Exemption from filing intimation of Combination : Transactionsthat are ordinarily not likely to have an Appreciable Adverse Effect [AAE] on

competition in India does not require filing of application with CCI as

prescribed under the Act



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IfCCI finds existence of anti-competitiveness or abuse of dominant position, it can

pass orders to:

1. Discontinue and not to re-enter such agreement or discontinue such abuse of dominant

position

2. Impose penalty:


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Case 1: A proposal for merger of the PSUs in the construction

industry of INDIA

A top government body for PSUs revival has made a case for merger of four state-

owned construction firms, including National Buildings Construction Corporation

(NBCC) and Hindustan Prefab (HPL), arguing that there is great synergy between

them.

The Board for Reconstruction of Public Sector Enterprises (BRPSE) has constituted a

task force to examine different options which may include project-based consortium

for business bids, sources said.

However, there is an opposition to the proposal in two of the cases-NationalBuilding Construction Corporation (NBCC) and HPL.

Two of the four companies (NPCC and HSCL) are sick and have been put on the

revival package.


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NBCC and HPL have positive balance sheets with net worth of Rs 637 crore

and Rs 10.09 crore, respectively.

NBCC, which achieved a profit of Rs 118 crore on a turnover of Rs 3,115 crore in

2010-11, would like to go in for a joint venture route with other PSUs like

HPL and Hindustan Steelworks Construction (HSCL), instead of outright merger.

The proposal for merger was discussed at the meeting of the BRPSE in June

where the reconstruction board felt that "all these companies in one way or

other are engaged in construction activities and possess synergies. A combined

entity by way of merger may create a giant company and are capable of

becoming a navratna firm".

Besides, HPL informed the board about its plan to start prefab steel and

concrete through a joint venture with SAIL. Therefore, it showedunwillingness for merger, they added.



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Lafarge Tarmac is a joint venture company formed following the merger of Lafarge UKand Anglo Americans Tarmac business, to create the UKs leading construction materials

and services company.

The 50:50 joint venture, which is equally owned by Lafarge and Anglo American plc,

combines both companys cement & lime, aggregates, readymix concrete, asphalt and

asphalt surfacing, maintenance services, and waste services businesses. Lafarge Tarmacbegan trading on 7 January 2013, following final clearance from the UK Competition

Commission.

Lafarge Tarmac is organized to give following broad areas of service:

1. Readymix Cement & Lime

2. Contracting Aggregates & Asphalt

These business units are structured to work together.


Case 2: A proposal for merger of the Lafarge and

Tarmac

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Merger Basics

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