STUDY 4 DUE DILIGENCE TAKEOVER AND ACQUISITIONS
1.
Discus scuss s vari vario ous forms rms of merg ergers. ers.
Ans: Merger is combination of two or more companies into a single company where one survives and the others lose their identity or a new company is formed. The survivor acquires the assets as well as liabilities of the merged company. As a result of a merge me rger, r, if one com company pany sur survive vives s and oth others ers los lose e the their ir ind indepe epende ndent nt entity, it is a case of ‘Absorption’. But if a new company comes into existence because of merger, it is a process of ‘Amalgamation’. Take Takeov over er is the the purc purcha hase se by one one comp compan any y of a cont contro roll llin ing g interes interestt in the share share capit capital al of anothe another r existin existing g comp company any.. In takeover, both the companies retain their separate legal entity. A takeover is resorted to gain control over a company while companies are amalgamated to derive advantage of scale of operations, achieve rapi rapid d grow rowth and and expan xpansi sio on and and buil build d stro strong ng manag anage erial rial and and technological competence so as to ensure higher value to shareowners. Indi Indian an take takeov over er king kings s are are R P Goen Goenka ka,, Chab Chabri ria, a, Khai Khaita tan, n, Kum Kumar Mangalam Birla and London based Swaraj Paul. Horizontal Merger
A horizontal merger is one that takes place between two firms in the same line of business. Merger of Hindustan Lever with TOMCO TOM CO and Glob Global al Tele Telecom com Services Ltd. with Atlas Telec Telecom, om, GEC GE C wi with th EE EEC C ar are e ex exam ampl ples es of Ho Hori rizo zonta ntall Me Merg rger er.. It involve involves s joining together together of two or more companies companies which are producing producing essentially the same products or rendering same or similar services or their products and services directly compete in the market with each othe other. r. It is a com combina binati tion on of two two or more ore firm firms s in sim similar ilar type type of production/distribution line of business. Horizontal mergers result in a redu reduct ctio ion n in the the num number ber of com competi peting ng com compani panies es in an indu indust stry ry,, increase the scope for economies of scale and elimination of duplicate faci facili liti tie es. Howe owever, ver, the their main ain draw drawba bac ck is that hat the they pro promote monopolistic trend in the industrial sector as the number of firms in an indu industr stry y is decre decrease ased d and and this this may may make make it easie easierr for for the indu indust stry ry members to collude for monopoly profits. Example: Gla Glaxo xo We Wellc llcom ome e Plc Plc.. and Smi Smith th Kli Kline ne Bee Beecha cham m Plc Plc.. me mega ga merger The two Briti British sh pharm pharmaceut aceutical ical heavyw heavyweight eights s Glaxo Wellcome Wellcome PLC and Smith Kline Beecham PLC early this year announced plans to merge resu re sult ltin ing g in th the e lar large gest st dru drug g ma manu nufac factu turin ring g co comp mpan any y gl glob obal ally. ly. Th The e merger created a company valued at $182.4 billion and with a 7.3 per cent share of the global pharmaceutical market. The merged company expected $1.6 billion in pretax cost savings after three years. The two
STUDY 4 DUE DILIGENCE TAKEOVER AND ACQUISITIONS
companies have complementary drug portfolios, and a merger would let them pool their research and development funds and would give the merged company a bigger sales and marketing force.
Vertical Mergers Vertical mergers take place between firms in different stages of production/operation, either as forward or backward integration. The basic reason is to eliminate costs of searching for prices, contracting, payment collection and advertising and may also reduce the cost of communicating and coordinating production. Both production and inventory can be improved on account of efficient information flow within the organisation. Unlike horizontal mergers, which have no specific timing, vertical mergers take place when both firms plan to integrate the production process and capitalise on the demand for the product. Forward integration take place when a raw material supplier finds a regular procurer of its products while backward integration takes place when a manufacturer finds a cheap source of raw material supplier.
Example: Merger of Usha Martin and Usha Beltron Usha Martin and Usha Beltron merged their businesses to shareholder value, through business synergies. The merger enable both the companies to pool resources and streamline and finance with operational efficiencies and cost reduction help in development of new products that require synergies
enhance will also business and also
.
Conglomerate Merger Conglomerate Merger is a fusion in unrelated lines of business. The main reason for this type of merger is to seek diversification for the surviving company. A case in point is the merger of Brooke Bond Lipton with Hindustan Lever. While the former was mostly into foods, the latter was into detergents and personal care. Firms opting for conglomerate merger control a range of activities in various industries that require different skills in the specific managerial functions of research, applied engineering, production, marketing and so on. This type of diversification can be achieved mainly by external acquisition and mergers and is not generally possible through internal development. These types of mergers are also called concentric mergers. Firms operating in different geographic locations also proceed
STUDY 4 DUE DILIGENCE TAKEOVER AND ACQUISITIONS
with these types of mergers. Conglomerate mergers have been subdivided into: • • •
Financial Conglomerates Managerial Conglomerates Concentric Companies
Financial Conglomerates These conglomerates provide a flow of funds to every segment of their operations, exercise control and are the ultimate financial risk takers. They not only assume financial responsibility and control but also play a chief role in operating decisions. They also: • • •
• •
Improve risk-return ratio Reduce risk Improve the quality of general and functional managerial performance Provide effective competitive process Provide distinction between performance based on underlying potentials in the product market area and results related to managerial performance.
Managerial Conglomerates Managerial conglomerates provide managerial counsel and interaction on decisions thereby, increasing potential for improving performance. When two firms of unequal managerial competence combine, the performance of the combined firm will be greater than the sum of equal parts that provide large economic benefits.
Concentric Companies The primary difference between managerial conglomerate and concentric company is its distinction between respective general and specific management functions. The merger is termed as concentric when there is a carry-over of specific management functions or any complementarities in relative strengths between management functions.
CASH MERGER- A merger in which certain shareholders are required to accept cash for their shares.
STUDY 4 DUE DILIGENCE TAKEOVER AND ACQUISITIONS a cash merger has to do with the mode of payment tendered in a business acquisition. The acquiring firm chooses to utilize cash as the means of purchasing the stock of the acquired firm, rather than utilizing its own stocks to complete the transaction. Typically, the acquiring firm will first purchase any shares held by the target company, then seek to purchase any shares currently in the possession of investors. One of the main benefits of a cash merger is that the new owner immediately gains all the assets of the acquired business, without any need to convert stocks or use some other process to prepare those assets for any desired use.
De Facto Merger Occurs where one corporation is absorbed by another, but without compliance with statutory requirements for a merger. It is an aquisition of assets. one corporation is absorbed by another, but without compliance with statutory requirements for a merger. For legal aspects of merger see sec 391 to 394 of CA, 1956. For Ex. There should be scheme of compromise or arrangement for merger. But in case of De Facto Merger the company is acquired without and such scheme of arrangement. or Without complying with the requirement of 391-394. Down Stream Merger The merger of parent company into its subsidiary is called down stream merger. Up stream Merger The merger of subsidiary company into its parent company is called an up stream merger. Short-form Merger A number of statues provide special company rules for the merger of a subsidiary into its parent where the parent owns substantially all of the shares of the subsidiary. This is known as a short form merger. Short form mergers generally may be effected by adoption of a resolution of merger by the parent company, and mailing a copy of plan of merger to all shareholders of subsidiary and filing the executed documents with the prescribed authority under the statute. This type of merger is less expensive and time consuming than the normal type of merger. Triangular Merger Triangular merger means the amalgamation of two companies by which the disappearing company is merged into subsidiary of surviving company and shareholders of the disappearing company receive shares of the surviving company. Reverse Merger
STUDY 4 DUE DILIGENCE TAKEOVER AND ACQUISITIONS
It occurs when firms want to take advantage of tax savings under the Income Tax Act (Section 72A) so that a healthy and profitable company is allowed the benefit of carry forward losses when merged with a sick company. Godrej soaps, which merged with the loss-making Godrej innovative Chemicals is an example of reverse merger. Reverse merger can also occur when regulatory requirements need one to become one kind of company or another. For example, the reverse merger of ICICI into ICICI Bank.
KINDS OF TAKEOVER
2.
Distinguish between Friendly Takeover Takeover. What is bail out takeover?
and
Hostile
Ans: Friendly Takeover: Friendly takeover is with the consent of taken over company. In friendly takeover, there is an agreement between the management of two companies through negotiations and the takeover bid may be with the consent of majority or all shareholders of the target company. This kind of takeover is done through negotiations between two groups. Therefore, it is also called negotiated takeover or friendly takover. Hostile Takeover: When an acquirer company does not offer the target company the proposal to acquire its undertaking but silently and unilaterally pursues efforts to gain control against the wishes of existing management, such acts of acquirer are known as ‘hostile takeover’. Such takeovers are hostile on the management and are thus called hostile takeover. The main difference is between these two’s is mutual understanding between acquirer company and takenover company. When there is mutual understanding, it is friendly takeover otherwise it is termed as hostile takeover. Bail Out Takeover: Takeover of a financially weak company by a profit earning company to bail out the former is known as bail out takeover. Such takeover normally takes place in pursuance to the scheme of rehabilitation approved by the financial institution or the scheduled bank, who have lent money to the sick company. The lead financial institutions, evaluates the bids received in respect of the purchase price track record of the acquirer and his financial position. This kind of takeover is done with the approval of the Financial Institutions and banks.
