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Topic allotted: Restructuring and Amalgamation

Subject: LEGAL ENVIRONMENT - BUSINESS LAW - MBA733

MAHENDRA PRABHU K

NITKS MBA 2013-15

13HM16

August 2014

1) Corporate Restructuring2) Amalgamation = Mergers and Acquisitions

IntroductionA business may grow either by organic or inorganic growth. In the case of organic growth, a firm grows gradually over time in the normal course of the business, through acquisition of new assets, replacement of the technologically obsolete equipments and the establishment of new lines of products. In case of an inorganic growth, the business either acquires another running business or merges with the same and grows overnight through combinations. These combinations are in the form of mergers, acquisitions, amalgamations and takeovers of existing business and have now become important features of business restructuring. Inorganic growth strategy is an important contributing towards the growth of a number of leading businesses the world over.

• Mergers or Amalgamations

A merger is a combination of two or more distinct businesses into one business. Merger is also substituted by the term 'amalgamation' in India. The Income Tax Act,1961 [Section 2(1A)] defines amalgamation as the merger of one or more companies with another or the merger of two or more companies to form a new company, in such a way that all assets and liabilities of the amalgamating companies become assets and liabilities of the amalgamated company and shareholders not less than nine-tenths in value of the shares in the amalgamating company or companies become shareholders of the amalgamated company.Mergers and acquisitions are both aspects of strategic management, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture. Mergers and acquisitions activity can be defined as a type of restructuring in that they result in some entity reorganization with the aim to provide growth or positive value

• Merger through Absorption:

Absorption is a combination of two or more organization into an 'existing organization'. All organizations except one lose their identity in such a merger. For example, absorption of X Ltd by Y Ltd. Y, an acquiring business (a buyer), survived after merger while X, an acquired company (a seller), ceased to exist. Business X transferred all its assets, liabilities and shares to Business Y.

• Merger through Consolidation:

A consolidation is a combination of two or more organizations into a 'new organization'. In this form of merger, all business entities are legally dissolved and a new entity is created. Here, the acquired business entity transfers its assets, liabilities and shares to the acquiring entity for cash or exchange of ownership stake. For example, merger of A Ltd, B Ltd, C Ltd and D Ltd into an entirely new company called E Ltd.

Services by an Indian investment banking firm

• Handling of all legal procedures & formalities (including advisory) in respect of Mergers, Amalgamations, Acquisitions, Demergers, Reconstruction, Restructuring etc., drafting of Schemes of Amalgamation / Arrangement, handling court process and departmental approvals for Mergers / Acquisitions, handling public offer for Acquisition / Takeover, share purchase transactions / deals, takeover of listed / unlisted companies pursuant to the provisions of the Companies Act, 1956, SEBI Takeover Code etc.

• Advising of pre-merger compromise proposals, determination of exchange ratio, capital issue.

• Assistance in Convening, conducting & holding of General Meeting & the meeting of the Creditors as required under Section 391 & 394.

• Handling matters pertaining to winding up of companies, closure of defunct companies.

• Benefits of Mergers & AcquisitionsThe most common motives and advantages of mergers and acquisitions are:

• Ability to overcome weaknesses:

Business has limited capacity and resources Internal growth requires that an organization should develop its operating facilities- manufacturing, research, marketing, introduce new technologies etc. But, lack or inadequacy of resources and time needed for internal development may constrain a organizations pace of growth. In order to overcome the same and accelerate business growth, it becomes essential to acquire production facilities as well as other resources from outside through mergers and acquisitions.

Achieving Economies of scale:

Combination or acquisition of business will lead to increase in the volume of production thereby leading to a reduction in the cost of production per unit. With merger, the fixed costs are distributed over a large volume of units causing the unit cost of production to decline. Economies of scale may also arise from other indivisibilities such as production facilities, management functions and management resources and systems.

Creating better Synergy:

Implies a situation where the combined firm is more valuable than the sum of the individual combining firms. It refers to benefits other than those related to economies of scale. Operating economies are one form of synergy benefits. But apart from operating economies, synergy may also arise from enhanced managerial capabilities, creativity, innovativeness, R&D and market coverage capacity due to the complementing resources and skills and a widened horizon of opportunities.

Diversification and Expansion:

Acquisitions gives organization an opportunity to diversify in other business, which otherwise was not possible for the organization due to being engrossed in current business activities. Diversification implies growth through the combination of firms in unrelated businesses and spreading of risk on number unrelated businesses. It results in reduction of total risks through substantial reduction of cyclicality of operations. Acquisition gives business an edge by making a direct entry into new business segment without undertaking much preparation.

Achieving financial strategy:•

Every business has its financial capacity and growing business needs large funds , merger may solve this problem as it results in achieving financial synergy and benefits the business in many ways:-

– Provides access to funds and thereby eliminates financial constraints– Mergers reflect financial strength and thereby increase valuation.– Merger of two companies can bring stability of cash flows which in

turn reduces the risk of insolvency and enhances the capacity of the new entity to service a larger amount of debt

– Due to financial stability, the merged firm is able to borrow at a lower rate of interest.

Overcoming Competition:

Merger and acquisition can be a useful tool for overcoming the increasing competition. A merger can increase the market share of the merged entity and improves the profitability of the firm due to economies of scale. The bargaining power of the firm vis-à-vis labour, suppliers and buyers is also enhanced. The merged firm can exploit technological breakthroughs against obsolescence and price wars.

Tax Benefits:

• Merging a business with accumulated losses with the one having profit, can help in reducing the tax liability of the business, for the purpose of income tax.

• Due to its inherent benefits, Mergers and acquisitions have today become an indispensable part of every business long term growth strategy.

Types of mergers

• Horizontal merger: It involves combination of two or more entities engaged in the same area of business. For example, combining of two telecom companies to gain dominant market share.

• Vertical merger:It involves combination of two or more entities engaged in different stages of production or distribution of the same product. For example, joining of a Newspaper publishing entity and a Books and journal publishing entity. Vertical merger may take the form of forward or backward merger. When a entity combines with the supplier of material, it is called backward merger and when it combines with the customer, it is known as forward merger.

• Conglomerate merger:It involves the combination of entities engaged in unrelated lines of business activity. For example, merging of different businesses like manufacturing of cement products, insurance investment and advertising agencies.

• Acquisitions and Takeovers An acquisition may be defined as an act of acquiring effective control by one entity over assets or

management of another entity without involving any combination of entities. Thus, in an acquisition the control of two or more business entities changes without effecting their independence and separate legal status. Acquisition can be of the following types:

• Voluntary Acquisition:

Where the acquirer acquires the business with the consent of its existing owner, is termed as voluntary acquisition. It involves discussion and deliberation with the current owners to finalize the terms and conditions of the acquisition. It is considered as peaceful process, under which the benefit of each of the party is taken into account.

• Hostile Acquisition:Where the acquirer acquires the business without the consent of its existing owners is termed as Hostile acquisition. In case the acquirer, either acquire shares from some and not all the owners of the business or from the market. It is not a peaceful process , as the management in such cases opposes the move of takeover.

Regulations for Mergers & Acquisitions• Mergers and acquisitions of Companies are regulated under various

laws in India. The objective of the laws is to make these deals transparent and protect the interest of all shareholders. They are regulated through the provisions of:

MergersThe Companies Act, 1956

• Section 391 and 394 of the Companies Act 1956 lays down the legal procedures for mergers of company with another company/Partnership/LLP:-

• Approval of Board of Directors: - The Board of Directors of the individual companies should approve the draft proposal for amalgamation and authorise the managements of the companies to further pursue the proposal.

Application in the High Court:- A petition for approving the draft amalgamation proposal duly approved by the board of directors of the individual companies should be made to the High Court, in whose jurisdiction the registered office of the company is situated and in case of companies fall under jurisdiction of different High Courts, than petition for approval shall be filed in each court.

•Shareholders' and creditors' meetings:- The individual companies should hold separate meetings of their shareholders and creditors for approving the amalgamation scheme. At least, 75 percent of shareholders and creditors in separate meeting, voting in person or by proxy, must accord their approval to the scheme. In case the requisite number of shareholders/creditors gives their written consent, than the High Court will dispense the requirement of holding the meeting.

Filing of the Court order: After the Court order, its certified true copies will be filed with the Registrar of Companies.

•Transfer of assets and liabilities: The assets and liabilities of the acquired company will be transferred to the acquiring company in accordance with the approved scheme, with effect from the specified date.

•Payment by cash or securities: As per the proposal, the acquiring company will exchange shares and debentures and/or cash for the shares and debentures of the acquired company.

Acquisitions Companies Act 1956

• Section 372A of the Companies Act 1956 lays down the legal procedures for acquisition:-

• Approval of Board of Directors: The proposal to acquire the company must be approved by unanimous vote of the Board of Directors.

• Approval of Shareholders: The approval of shareholders by way of special resolution for the proposed acquisition will be required when the aggregate amount of investments to be made together with aggregate amount of amount of loan/investment already made, guarantee and security provided to all other body corporate exceeds the 60% of its paid-up share capital and free reserves or 100% of its free reserves, whichever is more.

SEBI (Substantial Acquisition of Shares and Take-overs) Regulations, 1997

• In case of acquisition of stake in the company listed on any recognized stock exchange in India, the acquirer has to comply with the requirement of SEBI (Substantial Acquisition of Shares and Take-overs) Regulations, 1997. The regulation prescribes various upto which acquisition can be made and compliances to be undertaking the acquisition. The regulation prescribes that in case of acquisition of shares beyond the prescribed limits, the acquirer has to give an opportunity to the existing shareholders to sell their shares to them, by way of open offer.

General Laws

• The Competition Act, 2002 This Act is an antitrust law which seeks to regulate the various forms of business combinations through Competition Commission of India. Under the Act, no person or enterprise shall enter into a combination, in the form of an acquisition, merger or amalgamation, which causes or is likely to cause an appreciable adverse effect on competition in the relevant market and such a combination shall be void. Enterprises intending to enter into a combination may give notice to the Commission, but this notification is voluntary. But, all combinations do not call for scrutiny unless the resulting combination exceeds the threshold limits in terms of assets or turnover as specified by the Competition Commission of India.

Business valuation: The five most common ways to value a business are • Asset valuation• Historical earnings valuation• Future maintainable earnings valuation• Relative valuation (comparable company and comparable transactions)• Discounted cash flow (DCF) valuation

Although at present the majority of M&A advice is provided by full-service investment banks, recent years have seen a rise in the prominence of specialist M&A advisers, who only provide M&A advice (and not financing). These companies are sometimes referred to as Merchant Capital Advisors or Advisors, assisting businesses often referred to as "companies in selling."

Brand considerations

Mergers and acquisitions often create brand problems, beginning with what to call the company after the transaction and going down into detail about what to do about overlapping and competing product brands. Decisions about what brand equity to write off are not inconsequential. And, given the ability for the right brand choices to drive preference and earn a price premium, the future success of a merger or acquisition depends on making wise brand choices. Brand decision-makers essentially can choose from four different approaches to dealing with naming issues, each with specific pros and cons:

Keep one name and discontinue the other. The strongest legacy brand with the best prospects for the future lives on. In the merger of United Airlines and Continental Airlines, the United brand will continue forward, while Continental is retired.Keep one name and demote the other. The strongest name becomes the company name and the weaker one is demoted to a divisional brand or product brand. An example is Caterpillar Inc. keeping the Bucyrus International name.Keep both names and use them together. Some companies try to please everyone and keep the value of both brands by using them together. This can create an unwieldy name, as in the case of PricewaterhouseCoopers, which has since changed its brand name to "PwC".Discard both legacy names and adopt a totally new one. The classic example is the merger of Bell Atlantic with GTE, which became Verizon Communications. Not every merger with a new name is successful. By consolidating into YRC Worldwide, the company lost the considerable value of both Yellow Freight and Roadway Corp.

Previous Research findings in M&A management research

Given that the cost of replacing an executive can run over 100% of his or her annual salary, any investment of time and energy in re-recruitment will likely pay for itself many times over if it helps a business retain just a handful of key players that would have otherwise left.

Organizations should move rapidly to re-recruit key managers. It’s much easier to succeed with a team of quality players that one selects deliberately rather than try to win a game with those who randomly show up to play.

Financing OptionsMergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies. Various methods of financing an M&A deal exist:

• CashPayment by cash. Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder's shareholders.

• StockPayment in the form of the acquiring company's stock, issued to the shareholders of the acquired company at a given ratio proportional to the valuation of the latter.

Cash on hand Issue of debt Issue of stock Shares in treasury

Specialist advisory firms

Period Name Facet

1897-1904 First wave Horizontal mergers

1916-1929 Second wave Vertical mergers

1965-1969 Third wave Diversified conglomerate mergers

1981-1989 Fourth wave Congeneric mergers, Hostile takeovers, Corporate Raiding

1992-2000 Fifth wave Cross-border mergers

2003-2008 Sixth wave Shareholder activism, Private Equity, LBO

Year Purchaser Purchased Transaction value (USD)

2011 Google Motorola Mobility 9,800

2011 Microsoft Corporation Skype 8,500

2011 Berkshire Hathaway Lubrizol 9,220

2012 Deutsche Telekom MetroPCS 29,000

2013 Softbank Sprint Corporation 21,600

2013 Berkshire Hathaway H.J. Heinz Company 28,000

2013 Microsoft Corporation Nokia Handset & Services Business

7,200

2014 Facebook WhatsApp 19,000

2014 Comcast Time Warner Cable 45,200

2014 AT&T DirecTV 67,100

Examples of Mergers and Acquisitions in India

Tata Steel's mega takeover of European steel major Corus for $12.2 billion. The biggest ever for an Indian company. This is the first big thing which marked the arrival of India Inc on the global stage. The next big thing everyone is talking about is Tata Nano. Vodafone's purchase of 52% stake in Hutch Essar for about $10 billion. Essar group still holds 32% in the Joint venture. Hindalco of Aditya Birla group's acquisition of Novellis for $6 billion. Ranbaxy's sale to Japan's Daiichi for $4.5 billion. Sing brothers sold the company to Daiichi and since then there is no real good news coming out of Ranbaxy. ONGC acquisition of Russia based Imperial Energy for $2.8 billion. This marked the turn around of India's hunt for natural reserves to compete with China. NTT DoCoMo-Tata Tele services deal for $2.7 billion. The second biggest telecom deal after the Vodafone. Reliance MTN deal if went through would have been a good addition to the list. HDFC Bank acquisition of Centurion Bank of Punjab for $2.4 billion. Tata Motors acquisition of luxury car maker Jaguar Land Rover for $2.3 billion. This could probably the most ambitious deal after the Ranbaxy one. It certainly landed Tata Motors into lot of trouble. Wind Energy premier Suzlon Energy's acquistion of RePower for $1.7 billion. Reliance Industries taking over Reliance Petroleum Limited (RPL) for 8500 crores or $1.6 billion.

• Businesses can grow either organically i.e. by internal restructuring or inorganically i.e. by way of mergers, amalgamations or acquisitions. Each mode of growth has its own advantages and adopting any of aforesaid strategy depends upon the attitude of management and various other factors affecting the business.

• By way of internal restructuring, businesses can structure their organization in a manner that would harness inherent potential of the business, thereby creating value for the stakeholders. It can be achieved by re-organizing the balance sheet, hiving off business into various divisions, closing down of loss making business and various measures.

Business RestructuringCorporate Restructuring

• Businesses can choose to grow inorganically by exploring the synergies that would flourish by merging or acquiring business or diversifying into new line of business. Inorganic growth coupled with right strategies is a short route towards success and value creation.

• Both organic & inorganic growth are important business decision and are required to be taken after analyzing the requirement , current economic scenario and various other factors effecting the business and therefore you require expert guidance for the same.

• At ABC company, our team of experienced and expert professionals can help you in preparing & identifying the right business strategy for harnessing growth.

ABC investment banking company offers the following services:• Planning & Advising Mergers & Amalgamations• Corporate Restructuring• Financial re-engineering & Business Valuation• Internal Restructuring• Strategic Acquisitions & Takeovers• Deal Negotiation & Structuring• Equity Divestments• Demerger/ Strategic Sale