Mergers and Acquisitions (M & A)

1. Mergers and Acquisitions (M & A) An Overview Prepared by: YOGESH MITTAL Yogesh_mittal2@yahoo.co.in

2. Subject Index • Precedents • Reasons for Mergers and Acquisitions ( M & A ) • Basic Terms and their distinction • Considerations in events of M & A • Legal aspects • Finance aspects • Taxation Matters • Accounting for Amalgamations • Scheme of Amalgamation • Acquisition and takeovers • Way forward

3. Precedents • Takeover of Ashok leyland by Hindujas • Chabbria group took over Falcon tyres • Ceat tyres taken over by Goenkas • Pepsi & Coke taking over Parle and Indian soft drink companies • Take over of Tetley by Tata Tea. • Grasim acquired UltraTech through a Swap • Tata Motors’ acquisition of Daewoo • Jindal Vijaynagar steel merged Euro Iron & steel, Euro energy and JSW Power • ITC, Somani group through BIFR. • Recently Vijay Malaya took over Shaw Wallace

4. Why M & A • Horizontal growth for enlarged markets & optimum utilization • Vertical combination to economize cost and reduce tax burden • Diversification of Business • Combination of management, financial and human resources. Synergies • Improve dividend yield, earnings, book value of entities and cash flow of the entities. • Attraction to foreign investors • Financial Restructuring and • Tax Planning

5. Terminologies • Blending of two or more existing undertakings: “Amalgamation” • Sale of business - As a going concern – “Slump Sale” - Individual assets - “Itemised sale” • Merger / Amalgamation of existing business – “Merger” • Sell to a subsidiary – “Subsidiarisation” • Demerger • Secondary market / negotiated purchase of shares – “Share Purchase” • Issue of fresh shares (preferential issue) – “Fresh Issue”.

6. Crystal Clear

7. Considerations • Legal Aspects: • Companies Act, 1956 • MRTP Act • Industrial Development & regulation Act • Sick Industrial (special provisions) Act • SEBI Regulations • Finance Aspect: • Synergy • Valuation of firm – DCF / APV • Taxation Aspect: I.T.Act, 1961 • Accounting Aspect: AS 14 • Procedural Aspects – Scheme of Amalgamation

8. Legal Aspects I • Companies Act, 1956: Sections 391 to 396 • An application to be made to the court along with scheme of amalgamation, company’s final accounts. • Court has powers to supervise and modify the structuring of the scheme. Court can order a meeting of shareholders, members as it deems fit. • If a ¾ majority of such a meeting consents and the scheme is sanctioned by court, file it with registrar. • Court can order for merger of 2 cos. In public interest • In case of court merger, the transferor co. will be dissolved without winding up whereas in acquisition, the transferor co. continues to exist. • MRTP Now Competition Act: • Power retained with the government to order discontinue or restructuring of such combination agreement as would obtain dominant position.

9. legal Aspects II • Industrial (Development And Regulation Act): • High court can order to appoint anyone to takeover the management of the entity for running or restarting. • License of the amalgamating co. shall automatically be transferred to amalgamated co. • Sick Industrial (Special Provisions) Act: • Not applicable to non-industrial co.and small scale or ancillary undertaking. • Section 18 empowers BIFR to sanction the merger of a sick co. with another co. & vice versa considering the employee’s views. • SEBI: • Regulation 3 of SEBI regulations provides for the non applicability of takeover provisions to Amalgamations effected u/s 391 to 394 of companies act and Sick Industrial units u/s 18

10. Finance Aspect… Returns>cost • Synergy is the economic value of benefits arising out of Amalgamation. Synergy = VAB –(VA + VB)Hence, it signify the difference between combined value and individual values of entities. • Synergy can be a vital but a sole determinant of Amalgamation. Post merger integration, managerial talent can result in abnormal returns. • Valuation of the transferor entity can be done by DCF Methodology i.e. discounting the estimated future cash flows of entity (less) value of debt and other obligations as estimated. • An alternative approach to value target co. can be APV: • Value the company as if it were financed entirely with equity. • Estimate the value of financing side effects like tax shields etc • Add the two to arrive at APV.

11. Taxation Matters • Transferor Company can claim Capital gains exemption u/s 47(vi) • WDV of depreciable assets of transferor co. as on the appointed day to be added to the respective block of transferor co. Other Assets can be taken at actual cost – Expl (2) to Section 43(6)( C). • Depreciation claim to be split up between both cos. as per number of days • Only accumulated business loss & unabsorbed depreciation can be transferred. Capital loss to lapse. Transferee co. should be an Industrial undertaking, Shipping Company, Hotel or a Bank to claim benefits. • Tax benefits u/s 10A,10B,80IA,80IB shall be available continuously. • Amalgamation expenses can be claimed as deduction equally over 5 years period. • No transfer for shareholders of transferor Co. hence no tax liability. Period for which shares are held in transferor co. to be considered for indexation.

12. AS 14 : Accounting Interpretations • Applicable for Amalgamation as defined in Companies Act, 1956. Not applicable for other ways of reconstruction, takeover. • AS 14 to be followed only for accounting in books of transferee co. For transferor Co. has to be as per common principles. • Consideration includes shares, securities, cash and other assets by means of which obligation is discharged. • Amalgamation in nature of merger: Pooling of Interest • All Assets and liabilities of transferor taken over by transferee Co. • Consideration paid in equity shares except for fractional shares • Business of transferor co. to be carried on by transferee Co. • Shareholders of at least 90% or more in the transferor Co. to become shareholders in transferee co. • The Assets and Liabilities to be taken over at book values without making any adjustments by way of revaluation or otherwise. • Amalgamation in nature of purchase: Purchase method • If any of the conditions regarding amalgamation in nature of merger is not satisfied.

13. Pooling of interest In the Financial statements post Amalgamation, line by line addition of all assets and liabilities of all entities except share capital. Any Excess realised / loss suffered to be adjusted by reserves. For statutory reserves open Amalgamation adjustment a/c. Amortize goodwill arising out of such events over 5 years. Purchase Method Assets and liabilities to be recorded in the books at the value at which they are taken over by the transferee co. Any surplus over net assets to be debited to goodwill and loss suffered to be credited to capital reserve. Reserves and surplus shall not be transferred to the purchasing co. Treatment of statutory reserves and goodwill shall remain same as in pooling of interest method. Accounting Methods

14. Scheme of Amalgamation or Merger • No prescribed format for a scheme and is designed to suit terms and conditions relevant to proposal • Provision for vesting the assets and liabilities of transferor co. should be clearly defined. If transferee co. does not want to takeover any item, should mention it specifically. • Define the effective date from which the scheme is intended to come into operation. • Valuation of the shares to decide the exchange ratio. The method has to be appropriate and acceptable to majority. • Position of employees has to be clearly set out with a specific mention of transfer of employees at same terms and conditions. • The application for merger can be made by the company, members, creditors or liquidator.

15. Acquisitions and Takeovers • It is the purchase of one of the business as a going concern / acquisition of controlling interest in it in a friendly or a hostile way. • Takeover by reverse bid wherein a smaller co. gains control of a larger co. • Buy out is the acquisition by incumbent management of the business where they are employed. Full buy out is still a concept popular in OECD countries. • Direct negotiations / acquisitions of shares are the most common ways of takeover in India • No one shall acquire shares/voting rights of entitlements of over 15% without Public Announcement as prescribed by SEBI. • Guidelines for takeovers are embodied in clause 40B of the Listing Agreement of SEBI • Tax shield for unabsorbed losses and depreciation u/s 72A can be exploited through Acquisitions

16. Way Forward • From 15 mergers in 1988 India registered over 500 mergers by 1998. • A liberal economy, globalization and simplified procedures can boost the process in future • The Professional management of pre and post merger issues can result in favor • Business houses can look for new opportunities to exploit the scenario effectively.

17. THANK YOU