MACR Notes

Unit1:
Introduction of M & A: Meaning-types of mergers–Merger Motives- Theories of Mergers-
Mergers and industry life cycle, Reasons for failures of M & A-synergy-types of synergy–value
creation in M&A-SWOT analysis- BCG matrix. (Theory).
Unit2:
Merger Process: Procedure for effecting M & A-Five-stage model–Due diligence–Types,
process and challenges of due diligence-HR aspects of M & A–Tips for successful mergers-
Process of merger integration. (Theory).
Unit3:
Financial Evaluation of M & A: Merger as a capital budgeting-Business valuation
approaches-asset based, market based and income-based approaches-Exchange Ratio (Swap
Ratio)-Methods of determining exchange rate. (Theory and Problems).
Unit4:
Accounting aspects of Amalgamation: Types of amalgamations (Amalgamation in the nature
of merger and amalgamation in the nature of purchase)-Methods of Accounting-Pooling of
interest method and Purchase method)–Calculation of purchase consideration-Journal entries
in the books of transferor & transferee company-Ledger accounts in the books of transferor
and transferee companies. (Theory and Problems).
Unit 5:
Acquisitions/Takeovers: Meaning and types of acquisition/takeovers (Friendly and Hostile
takeovers)-Anti-takeover strategies-Anti-takeover amendments-Legal aspects of M & A-
Combination and Competition Act- 2002Competition Commission of India (CCI)-The SEBI
Substantial Acquisition of Shares and Takeover (Takeover code-2011). (Theory).
Unit 6:
Corporate Restructuring: Meaning, significance and forms of restructuring–sell-off, spin-
off, divestitures, demerger, Equity Carve Out (ECO), Leveraged Buy Outs (LBO),
Management Buy Out (MBO), Master Limited Partnership (MLP), Limited Liability
Partnership (LLP) and joint ventures. (Theory).
 Unit1:
Introduction of M & A: Meaning-types of mergers–Merger Motives- Theories of Mergers-
Mergers and industry life cycle, Reasons for failures of M & A-synergy-types of synergy–value
creation in M&A-SWOT analysis- BCG matrix. (Theory).

Mergers
1. In the pure sense of the term, a merger happens when two firms agree to go forward as a
single new company rather than remain separately owned and operated. This kind of action is
more precisely referred to as a "merger of equals".
2. A merger refers to the process whereby at least two companies combine to form one single
company. Business firms make use of mergers and acquisitions for consolidation of markets
as well as for gaining a competitive edge in the industry.

The phrase mergers and acquisitions refers to the aspect of corporate strategy, corporate
finance and management dealing with the buying, selling and combining of different
companies that can aid, finance, or help a growing company in a given industry grow rapidly
without having to create another business entity.
Merger – Combination and pooling of equals, with newly created firm often taking on a new
name
Acquisition – One firm, the acquirer, purchases and absorbs operations of another, the acquired
A merger is a combination of two or more companies into one company.
It may be in the form of one or more companies being merged into an existing company or a
new company may be formed.
Thus, merger may take any of two forms:
1. Merger through absorption: a combination of two or more companies into an existing
company is known as absorption.
2. Merger through consolidation: a consolidation is a combination of two or more
companies into a new company.

Objectives of Mergers and Acquisitions

To create a more cost-efficient operation
To expand a firm’s geographic coverage
To extend a firm’s business into new product categories or international markets

To gain quick access to new technologies or competitive capabilities

To invent a new industry and lead the convergence of industries whose boundaries are blurred
by changing technologies and new market opportunities

Categories of Merger
A merger is said to occur when two or more companies combine into one company. Mergers
may take any one of the following forms.
Amalgamation
Absorption
Combinations
Acquisitions
Takeover
Demergers

1. Amalgamation
Ordinarily amalgamation means merger.
Amalgamation: is used when two or more companies’ carries on similar business go into
liquidation and a new company is formed to take over their business.
Ex: the merger of Brooke Bond India Ltd., with Lipton India Ltd., resulted in the formation of
a new company Brooke Bond Lipton India Ltd.
2. Absorption
Absorption is a combination of 2 or more companies into an existing co. All co’s except one
lose their identity in a merger through absorption.
Ex: Absorption of Tata Fertilizer Ltd (TFL) by Tata Chemicals LTd (TCL)
TCL an acquiring co (buyer); survived after merger while TFL an acquired co ( a seller) ceased
to exist.
TFL transferred its assets, liabilities and shares to TCL under the scheme of merger.
3. Combinations/ Consolidation
Consolidation: two or more companies combine to form a new company. In this form of merger
all companies are legally dissolved and a new entity is created.
In a consolidation, the acquired company transfers its assets, liabilities and shares to the new
company for cash or exchange of share.
Ex : Merger or amalgamation of Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian
software co Ltd and Indian Reprographics ltd in 1986 to an entirely new co, called HCL ltd.
4. Acquisitions
Acquisition means acquiring the ownership in the company. When 2 companies become one ,
but with the name and control of the acquirer, and the control goes automatically into the hands
of the acquirer.
A classic example in this context is the acquisition of TOMCO by HLL.
5. Takeover
A takeover generally involves the acquisition of a certain stake in the equity capital of a
company which enables the acquirer to exercise control over the affairs of the company.
Takeover implies acquisition of controlling interest in a company by another company. It
doesn’t lead to the dissolution of the company whose shares are being / have been acquired. It
simply means a change of controlling interest in a company through the acquisition of its shares
by another group. Ex: HINDALCO took over INDAL by acquiring a 54% stake in INDAL
from its overseas parent, Alcan. However, INDAL was merged into HINDALCO.
6. Demergers
Demerger or split or division of a company is opposite of mergers and amalgamations
Ex: Hero Honda demerged from Honda and became Hero.

Types of merger
Horizontal Mergers
Vertical Mergers
Conglomerate Mergers
Concentric Mergers
Circular Combination
1. Horizontal Merger
This involves two firms operating in the same kind of business activity. Both acquiring and the
target company belong to same industry. Main purpose is to obtain economies of scale in
production by eliminating duplication of facilities and operations.
This is a combination of two or more firms in similar type of production, distribution or area
of business.
Motives:
Elimination or reduction in competition
Putting an end to price cutting
Economies of scale in production
Research and development
Better control over Marketing and management.
Increase market power
Ex: combining of book publishers or two mufgco’s to gain dominant mkt share. (Mittal’s
Strategy)
The acquisition of American Motors by Chrysler in 1987 represents a horizontal combination
or merger.
Bank of Madura was merged with ICICI Bank.

2. Vertical Merger
This occurs between firms in different stages of production and operation. Expands the
espousing backward integration to assimilate sources of supply and forward integration
towards market outlets. Vertical merger occurs when a firm acquires firms ‘Upstream’ from it
or firms ‘downstream’ from it.
In case of an ‘Upstream’ merger it extends to the firms supplying raw materials and to those
firms that sell eventually to the consumer in the event of a ‘down-stream’ merger. When co
combines with the supplier of materials it is called backward merger and when it combines
with the customer it is known forward merger.
EX: Vertical Forward Integration – Buying a customer
Indian Rayon’s acquisition of Madura Garments along with brand rights
Vertical Backward Integration – Buying a supplier
IBM’s acquisition of Daksh
Merits:
Low buying cost of materials
Lower distribution costs
Assured supplies and market
Increasing or creating barriers to entry for potential competitors

3. Conglomerate Merger
This occurs between companies engaged into two unrelated industries. Conglomerate merger
represents a merger of firms engaged in unrelated lines of business.
Rationale for such merger :Diversification of risk
3 types of Conglomerate merger:
a) Product-extension mergers broaden the product lines of firms. These are mergers between
firms in related business activities and may also be called concentric mergers. These mergers
Borden the product lines.
Product Extension: New product in Present territory
P&G acquires Gillette to expand its product offering in the household sector and smooth out
fluctuations in earning.
b) geographic market-extension merger involves two firms whose operations have been
conducted in non-overlapping geographic areas.
Ex: Pizza Hut a fast food chain restaurant centered in USA, sought to wow Indian customers
by opening their restaurant in all most all major urban centers of India.
c) Pure conglomerate mergers involve unrelated business activities. These would not qualify
as either product-extension or market extension.
New product & New territories
Indian Rayon’s acquisition of PSI Data Systems.
Mohta Steels with Vardhaman Spinning Mills Ltd.

4. Concentric Mergers: A merger in which there is carry –over in specific mgt functions (ex:
mktg) or complementarily in relative strengths among specific mgt functions rather than carry-
over/complementarities in only generic mgt functions (eg: planning).
Therefore, if the activities of the segments brought together are so related that there is carryover
of specific mgt functions (mufg, finance, mktg, personnel, & so on) or complementarily in
relative strengths among these specific mgt functions, the merger should be termed concentric
rather than conglomerate.
Ex: if one co., has competence in research, mufg., or mktg that can be applied to the pdt
problems of another co., that lacks that particular competence, a merger will provide the
opportunity to lower cost function.
Firms seeking to diversify from advanced technology industries may be strong on research but
weaker on pdtn., and mktg., capabilities firms in industries with less advanced technology.

5.Circular Combination/circular merger

This happens among companies producing distinct products to share common research and
distribution facilities to obtain economies by elimination of cost on duplication and promoting
market enlargement.
Acquiring company has the benefit in form of economies of resource sharing and
diversification
When the firms belonging to the different industries and producing altogether different
products combine together under the banner of central agency, it is referred as mixed or circular
mergers.
Ex: Merger of Sony (camera provider for mobiles)Erricson(cell phone producer)

Circular Merger involves bringing together of products or services that are unrelated but
marketed through the same channels, allowing shared dealerships. Ex: McLeod Russell (a tea
company) with Eveready Industries (batteries).
Motives of M and A:
a) Strategic Motives
Expansion and growth
Dealing with entry of MNC’s
Economies of scale
Synergy
Market penetration
Market leadership
Backward/ Forward Integration
New product entry
New market entry
Surplus resources
Minimize size
Risk reduction
Balancing product cycle
Growth and diversification strategy
Re-fashioning

b) Financial Motives
Deployment of surplus funds
Fund raising capacity
Market capitalization
Tax planning
Creation of shareholders value
Tax benefits
Revival of sick units
Asset stripping (Selling assets for profit as it is not productive for the company)
Undervaluation of target company
Increasing EPS

c) Organizational Motives
Superior management
Ego satisfaction
Retention of managerial talent
Removal of inefficient management

Acquisition:
An acquisition, also known as a takeover or a buyout, is the buying of one company (the
‘target’) by another. Consolidation is when two companies combine together to form a new
company altogether.
An acquisition may be private or public, depending on whether the acquiree or merging
company is or isn't listed in public markets. An acquisition may be friendly or hostile. Whether
a purchase is perceived as a friendly or hostile depends on how it is communicated to and
received by the target company's board of directors, employees and shareholders. It is quite
normal though for M&A deal communications to take place in a so called 'confidentiality
bubble' whereby information flows are restricted due to confidentiality agreements.
In the case of a friendly transaction, the companies cooperate in negotiations; in the case of
a hostile deal, the takeover target is unwilling to be bought or the target's board has no prior
knowledge of the offer.

Theories of mergers
I. Efficiency theories
A. Differential managerial efficiency
B. Inefficient management
C. Operating synergy
D. Pure diversification
E. Strategic realignment to changing environments
F. Undervaluation
II. Information and signaling
III. Agency problems and managerialism
IV. Free cash flow hypothesis
v. Market power
VI. Taxes
VII. Redistribution.

1. Differential Efficiency
The differential efficiency explanation can be formulated more vigorously and may be called
a managerial synergy hypothesis. If a firm has an efficient management team whose capacity
is in excess of its current managerial input demand, the firm may be able to utilize the extra
managerial resources by acquiring a firm that is inefficiently managed due to shortage of such
resources.
For example, if the management of firm A is more efficient than the management of firm B
and if after firm A acquires firm B, the efficiency of firm B is brought up to the level of
efficiency of firm A, efficiency is increased by merger. The level of efficiency in the economy
would be raised by such mergers.
2. Inefficient Management
Inefficient management is simply not performing up to its potential. Another control group
might be able to manage the assets of this area of activity more effectively.
Inefficient management theory could be a basis even for mergers between firms with unrelated
businesses. Several observations can be made on the theory.
First, the theory assumes that owners of acquired firms are unable to replace their own
managers, and thus it is necessary to invoke costly mergers to replace inefficient managers.
Second, if the replacement of incompetent managers were the sole motive for mergers, it
should be sufficient to operate the acquired firm as a subsidiary rather than to merge it into the
acquirer.
Third, one clear prediction made by the theory is that the managers of the acquiring firm will
be replaced after the merger. Empirical evidence suggests that this is not the case at least in
conglomerate mergers. Based on his dissertation study of 28 conglomerate firms, Lynch (1971,
USA) concludes that these firms tried to acquire companies with capable managements that
could be retained.
3. Synergy
Synergy refers to the type of reaction that occur when two substances or factors combine to
produce a greater effect together than that with the sum of the two operating independently
could account for. It refers to the phenomenon 2+2=5.

Financial Synergy
The impact of a corporate merger or acquisition on the costs of capital to the acquiring or the
combined firm refers to financial synergy. Financial synergy occurs as a result of the lower
costs of internal financing versus external financing. A combination of firms with different
cash flow positions and investment opportunities may produce a financial synergy and achieve
lower cost of capital. A firm in a declining industry will provide large cash flows since there
are few attractive investment opportunities. A growth industry has more investment
opportunities than cash with which to finance them
Operating Synergy
This theory assumes that economies of scale do exist in the industry and that prior to the
merger; the firms are operating at levels of activity that fall short of achieving the potentials
for economies of scale.
Ex: one firm might be strong in cash but weak in marketing while another has strong marketing
department without the R&D capability. Merging the two firms would result in operating
synergy. One problem in merging is- how to combine and coordinate the good parts of the
organization and eliminate what is not required?
Vertical integration is one area in which operating economies may be achieved.
Combining firms at different stages of an industry may achieve more efficient coordination of
the different levels.

4. Pure Diversification
• First, in contrast to the position of shareholders who can diversify across firms in the capital
market, employees of the firm have only a limited opportunity to diversify their labor sources.
Diversification of the firm can provide managers and other employees with job security and
opportunities for promotion and, other things being equal, results in lower labor costs.
• Second, in the modern theory of the firm, information on employees is accumulated within
the firm over time. If the firm is diversified, teams can be transferred from unprofitable business
activities to growing and profitable activities. Diversification may ensure smooth and efficient
transition of the firm’s activities and the continuity of the teams and the organization.
• Third, firms have reputational capital which customers, suppliers and employees utilize in
establishing their relationships with the firm. Diversification can help preserve the firm’s
reputational capital which will cease to exist if the firm is liquidated.
• Fourth, diversification can increase corporate debt capacity and decrease the present value of
future tax liability. These effects are a result of the decrease in cash flow variability due to the
merger.

5. Strategic Realignment to Changing Environments

• Strategic planning is concerned with the firm’s environments and constituencies, not just
operating decisions. The strategic planning approach to mergers implies either the possibilities
of economies of scale or tapping an underused capacity in the firm's present managerial
capabilities.
• The speed of adjustment through merger would be quicker than internal development. There
may be opportunities to realize synergies in managerial capabilities. On the other hand, a
competitive market for acquisitions implies that the net present value from merger and
acquisition investments is likely to be small.

However, if these investments exploit synergy opportunities and can be used as a base for still
additional investments with positive net present values, the strategy may succeed.

6. Undervaluation
Some studies attribute merger motives to the undervaluation of target companies. One cause of
undervaluation may be that management is not operating the company up to its potential.
Second possibility is that the acquirers have inside information. How they acquired this special
information may vary with circumstances, but if the bidders possess information which the
general market does not have, they may place a higher value on the shares than currently
prevails in the market.
Another aspect of the under valuation theory is the difference between the market value of
assets and their replacement costs.

II. INFORMATION & SIGNALING

It attempts to explain why target shares seem to be permanently revalued - in a tender offer
whether or not it is successful. The information hypothesis says that the tender offer sends a
signal to the market that the target shares are undervalued or alternatively the offer signals
information to target mgt., which inspires them to implement a more efficient strategy on their
own.

III. AGENCY PROBLEMS AND MANAGERIALISM

It may result from a conflict of the interest b/w managers & shareholders or b/w shareholders
& debt holders. A number of organization& market mechanisms serve to discipline self-serving
managers & takeovers are viewed as the discipline of last resort.
Managerialism: Managers want to increase the size of the company through mergers so as to
increase their power and pay packages.

IV FREE CASH FLOW HYPOTHESIS

It says that takeover take place because of the conflict’s b/w managers & shareholders over the
pay out of free cash flows. Hypothesis assumes that free cash flow should be paid out to
shareholders reducing the power of mgmt.& subjecting managers to the security of the public
capital markets more frequently.

V. MARKET POWER
It claims that merger gains are the result of increased concentration leading to collusion &
monopoly effects.

VI. TAX EFFECTS

Carryover of net operating losses & tax credits, stepped-up asset basis & the substitution of
capital gains for ordinary income are among the tax motivations.
VI. HUBRIS HYPOTHESIS
It is an explanation of why mergers may happen even if the current market value of the target
firm reflects its true economic value. It implies that managers look for acquisition of firms for
their own potential motives & that the economic gains are not the only motivation for the
acquisition.

VII. REDISTRIBUTION
A final theory of the value increases to shareholders in takeovers is that the gains come at the
expense of other stakeholders in the firm. Expropriated stakeholders under the redistribution
hypothesis may include bondholders, the government (in the case of tax savings), and
organized labor.

VII. Q-ratio: Q-ratio indicates the market value of shares to replacement cost of assets which
may change due to inflation and depreciation. In order to have a satisfactory ratio, managers
may want to buy undervalued assets and acquire assets more cheaply when the stock of the
existing companies is less than the cost of purchase of such assets. The ideal q-ratio has to be
between 0.5--0.6.

SYNERGY
Synergy represents the two plus two equals to five effect (2+2=5) phenomenon. What is critical
is how the extra gains are to be achieved. Synergy refers to the type of reactions that occur
when two substances or factors combine to produce a greater effect together than that which
the sum of the two operating independently could account for.
One example of synergy is found in the history of pharmaceutical industry when after World
War II the major firms shifted from producing bulk chemicals for others. To process to an
emphasis on basic research and packaging products that were ready for final sale. A sales
organization also was required. After a no. of years, synergistic mergers took place involving
companies strong in research or marketing with companies that had complementary strengths
and weaknesses.

TYPES OF SYNERGY
1. Operating synergy
2. Financial synergy
3. Managerial synergy

1. Operating synergy
Operating synergy or operating economies may be involved in horizontal and vertical mergers.
For horizontal mergers the source of operating economies must represent a form of economies
of scale. The economies, in turn, may reflect indivisibilities and better utilization of capacity
after the merger.
Another area in which operating economies may be achieved is vertical integration. Combining
firms at different stages of an industry may achieve more efficient coordination of the different
levels. Costs of communication, and various forms of bargaining and opportunistic behaviour
can be avoided by vertical integration.

2. Financial synergy
The motive of the merger is to capture investment opportunities available in the acquired firm’s
industry by lowering the costs of capital of the combined firm through the merger and also
utilizing lower-cost internal funds of the acquiring firm. The opportunity for utilizing the cash
flows of the acquiring firm will be enhanced if the cash flow of the acquired firm is low.
The decrease in bankruptcy probability may decrease the expected value of bankruptcy costs
and increase the expected value of tax savings from interest payments for premerger debts, and
thus increase the value of the combined firm by lowering its cost of capital.
Internal funds do not involve transaction costs of the flotation process and may have differential
tax advantages over external funds.
The acquiring firms may supply lower-cost internal funds to the combined firm. Further, the
acquired firms will typically have low free cash flows because high expected demand growth
in their industries requires greater investments. The low free cash flows of the acquired firms
provide synergistic opportunities in financing. Economies of scale in floatation and transaction
costs of securities are another potential source of financial synergy.

3. Managerial synergy
Now imagine a production process employing four factor inputs ---- generic managerial
capabilities, industry-specific managerial capabilities, firm-specific nonmanagerial human
capital and capital investment.
The firm-specific non-managerial human capital can only be supplied by a long-term learning
effort or by merging with existing firms in the same industry. The industry-specific managerial
resources can be obtained by internal learning or by merging with a firm in the same or related
industries.
Suppose that a firm, call It B has ‘excess capacity’ in industry specific resources and that
another firm in a related industry, call it T experiences ‘shortages’ in these resources.
The acquisition of T by B will make the firms realize more balanced factor proportions between
industry-specific and firm-specific resources by transferring the excess capacity of B in the
industry-specific capabilities to T’s operation.
An example of the T-type firm will be an R&D oriented firm lacking marketing organizations
and being acquired by a B-type firm with strong marketing capabilities in related fields of
business.

Value creation in Horizontal, Vertical and Conglomerate mergers

a) Horizontal merger
A horizontal merger is one that takes place between two companies that are essentially
operating in the same market. Their products may or may not be identical. The horizontal
merger takes place between business competition who are manufacturing, selling and
distributing the similar type of service for profit.
Horizontal merger results in reduction of competitors in the same industry. This, type of merger
enables to derive the benefit of economies of scale & elimination of competition. But it leads
to increase in monopolistic tendency in the market.
For example, merger of Tata Oil Mills Company Ltd. with Hindustan Lever Ltd. is a horizontal
merger. Both the companies have similar products.
b)Vertical Merger
A vertical merger is one in which the company expands backwards by merging with a company
supplying raw material or expands forward in the direction of the ultimate consumer. Thus in
a vertical merger, there is a merging of companies engaged at different stages of the production
cycle within the same industry.
The vertical merger will bring the firms together who are involved in different stages of
production, process or operation. A vertical merger allows for smooth flow of production,
reduced inventory, and reduction in operating cost, increase in economies of scale, elimination
of bottlenecks etc.
For example, the merger of Reliance Petrochemicals Limited with reliance industry limited is
an example of vertical merger with backward linkage as far as RIL is concerned.
c) Conglomerate Merger
In a conglomerate merger, the concerned companies are in totally unrelated lines of business.
This type of merger involves the integration of companies entirely involve in a different set of
activities, products or services. The merging companies are neither competitors nor
complementary to each other.
This form of merger is resorted to increase economic power, profitability, diversification of
activities.
For example, Mohta Steel Industries Limited merged with Vardhaman spinning mills Ltd.
Conglomerate mergers are expected to bring about stability of income & profits, since the two
units belong to different industries.

Changing Factors contributing to Mergers & Acquisitions or Internal and external

change forces contributing to M & A activities
1. Technological changes (technological requirements of firm has increased)
2. Economies of scale and complimentary benefits (growth opportunities among product areas
are unequal)
3. Opening up of economy or liberalization of economy
4. Global economy (increase in competition)
5. Deregulation
6. New industries were created.
7. Negative trends in some economies.
8. Favorable economic & financial conditions (real time financial planning and control
information requirements have increases).
9. Widening inequalities in income & wealth
10. High valuation on equities.

Reasons for failures of M/A

1. Size issues
2. Diversification
3. Poor organization fit
4. Poor strategic fit
5. Previous acquisition experience
6. Limited focus
7. Failure to take immediate control.

M & A – A strategic perspective

Mergers and Acquisition activities should take place within the framework of long range
planning by business firms. M&A are the most popular means of corporate restructuring or
business combinations. It is believed that mergers and acquisitions are strategic decisions
leading to the maximization of the company’s growth by enhancing its production and
marketing operations. The reasons why M&A activities are considered to strategic in decision
are:
It includes huge amount of investment and the benefits are long term in nature.
Maintaining or accelerating a company’s growth, particularly when the internal growth is
considered due to scarcity of resources.
Enhancing profitability, through cost reduction resulting from economies of scale, operating
efficiency and synergy.
Diversifying the risk of the company, particularly when it acquires those businesses whose
income streams are not correlated.
Industry life cycle and product life cycle analysis in M&A decision

INDUSTRY LIFE CYCLE - Four Distinct Stages

Introduction or Pioneering Stage
Growth Stage
Maturity Stage
Decline Stage

1. Pioneering Stage
Characteristics
1) No Ready Market
2) Sales Are Low
3) Important Pricing Strategy
2. Growth Stage
Characteristics
1) Increased Demand for Product
2) Increased Sales of Products
3) Entry of Competitors
4) Competition Oriented Pricing
3. Maturity Stage
Characteristics
1) Demand Reaches Saturation Point
2) Tough Competition
3) Product Differentiation
4. Decline Stage
Characteristics
1) Sales begin to fall
2) Availability of new advanced products
3) Price margin get depressed

Role of Industry Life Cycle

Various Stages of Industry Life Cycle are –
1.Fragmentation Stage:
At this stage, the new industry normally arises when an entrepreneur overcomes the twin
Problems of innovation and invention, and works out how to being the new product and
services into the market.
Example: Air travel services of major airlines in Europe were sold to a target market at a high
price, concentrating on people with high income group. Ryan air was the first airline to engage
low cost airlines in Europe. Its services were perceived as the innovation of the European
Airline industry.
Eliminated unnecessary services offered by traditional airlines. No free meals, uses paper-free
air tickets, using secondary airports and offers frequent flights

2. Shake out Stage:

During this stage, competitors start to realize business opportunities in the emerging industry.
The value of the industry also rises.
Example: UK govt. decided to launch a campaign to encourage people to quit smoking.
Nicorette, a manufacturer of various nicotine products encouraged people quit smoking by
giving them Nicolette patches and Nicorette gums. Nic Lite realized the opportunity and
entered this industry and extended beyond UK border when the govt introduced non-smoking
policy in public places. This business threat created a new business opportunity to launch Nic
Time (an eight ounce bottle containing a lemon-flavored drink laced with nicotine, the same
amount of nicotine as two cigarettes.

3. Maturity:
A stage at which the efficiencies of the dominant business model give these organizations
Competitive advantage over competition. Some companies may shift some of the production
to overseas for gaining competitive advantage.
Example – Toyota – export and import taxes mean that its cars lose competitiveness to the local
competitors (in European market). Thus Toyota decided to open a factory at UK. Nike has
factories in China and Thailand as both countries have cheap labor and materials. However,
their overseas partners are not allowed to sell shoes produced. These have to be shipped back
to US, and then will be exported to other countries.

4.Decline:
A stage during which a war of slow destruction between businesses may develop and those
with heavy bureaucracies may fail. In this stage, many companies may leave the industry or
they may develop new products / services. This will create a new industry.
Example : communication industry - the communication process of pagers couldn’t be
accomplished without telephones. To send messages to another pager, the user had to phone
the call-center staff that would type and send message to another pager. On the other hand,
people who use mobile phones can make a phone-call and send messages to other mobiles
without going thru call-center staff.

Strategic approaches to M&A

Mergers and acquisitions specialists assist businesses which are considering making changes
to their corporate structure by joining forces with another company in some way. By combining
expertise in corporate finance, corporate strategy and business management, M&A experts
provide companies with expert advice regarding company restructure and the potential impact
of a merger or acquisition.
Although the terms ‘merger’ and ‘acquisition’ are often used synonymously, they are in fact
very different. A merger involves two companies joining together to become one company,
whilst an acquisition generally involves one company buying out or taking over another
company. The company which has been taken over or ‘acquired’ then ceases to exist. There
are various strategic reasons for companies to consider making an acquisition and a successful
takeover can help companies achieve their strategic objectives as well as increase cost
effectiveness within the business.

SWOT ANALYSIS
Identifying Strengths, Weaknesses, Opportunities and Threats would appear to be easily
accomplished. However much subjectivity is involved. While opportunities may exist, the
difference in cost may require careful balancing of consideration. On balance, this approach
may provide a useful starting point developing a strategic planning process and to stimulate
strategic thinking in an organization.

The Key Distinction - Internal and External Issues

Strengths and weaknesses are internal factors. For example, strength could be your specialist
marketing expertise. A weakness could be the lack of a new product.

Opportunities and threats are external factors. For example, an opportunity could be a
developing distribution channel such as the Internet, or changing consumer lifestyles that
potentially increase demand for a company's products. A threat could be a new competitor in
an important existing market or a technological change that makes existing products potentially
obsolete.
it is worth pointing out that SWOT analysis can be very subjective - two people rarely come-
up with the same version of a SWOT analysis even when given the same information about the
same business and its environment. Accordingly, SWOT analysis is best used as a guide and
not a prescription. Adding and weighting criteria to each factor increases the validity of the
analysis.

Areas to Consider
Some of the key areas to consider when identifying and evaluating Strengths, Weaknesses,
Opportunities and Threats are listed in the example SWOT analysis below:
BCG matrix
Introduction
The business portfolio is the collection of businesses and products that make up the company.
The best business portfolio is one that fits the company's strengths and helps exploit the most
attractive opportunities.
The company must:
(1) Analyse its current business portfolio and decide which businesses should receive more or
less investment, and
(2) Develop growth strategies for adding new products and businesses to the portfolio, whilst
at the same time deciding when products and businesses should no longer be retained.
Methods of Portfolio Planning
The two best-known portfolio planning methods are from the Boston Consulting Group (the
subject of this revision note) and by General Electric/Shell. In each method, the first step is to
identify the various Strategic Business Units ("SBU's") in a company portfolio. An SBU is a
unit of the company that has a separate mission and objectives and that can be planned
independently from the other businesses. An SBU can be a company division, a product line
or even individual brands - it all depends on how the company is organised.
Using the BCG Box (an example is illustrated above) a company classifies all its SBU's
according to two dimensions:
On the horizontal axis: relative market share - this serves as a measure of SBU strength in
the market
On the vertical axis: market growth rate - this provides a measure of market attractiveness
By dividing the matrix into four areas, four types of SBU can be distinguished:
Stars - Stars are high growth businesses or products competing in markets where they are
relatively strong compared with the competition. Often they need heavy investment to sustain
their growth. Eventually their growth will slow and, assuming they maintain their relative
market share, will become cash cows.
Cash Cows - Cash cows are low-growth businesses or products with a relatively high market
share. These are mature, successful businesses with relatively little need for investment. They
need to be managed for continued profit - so that they continue to generate the strong cash
flows that the company needs for its Stars.
Question marks - Question marks are businesses or products with low market share but which
operate in higher growth markets. This suggests that they have potential, but may require
substantial investment in order to grow market share at the expense of more powerful
competitors. Management have to think hard about "question marks" - which ones should they
invest in? Which ones should they allow to fail or shrink?
Dogs - Unsurprisingly, the term "dogs" refers to businesses or products that have low relative
share in unattractive, low-growth markets. Dogs may generate enough cash to break-even, but
they are rarely, if ever, worth investing in.
Using the BCG Box to determine strategy
Once a company has classified its SBU's, it must decide what to do with them. In the diagram
above, the company has one large cash cow (the size of the circle is proportional to the SBU's
sales), a large dog and two, smaller stars and question marks.
Conventional strategic thinking suggests there are four possible strategies for each SBU:
(1) Build Share: here the company can invest to increase market share (for example turning a
"question mark" into a star)
(2) Hold: here the company invests just enough to keep the SBU in its present position
(3) Harvest: here the company reduces the amount of investment in order to maximise the
short-term cash flows and profits from the SBU. This may have the effect of turning Stars into
Cash Cows.
(4) Divest: the company can divest the SBU by phasing it out or selling it - in order to use the
resources elsewhere (e.g. investing in the more promising "question marks").
Porter’s five forces model
Bargaining Power of Suppliers
The term 'suppliers' comprises all sources for inputs that are needed in order to provide goods
or services.
Supplier bargaining power is likely to be high when:
· The market is dominated by a few large suppliers rather than a fragmented source of supply,
· There are no substitutes for the particular input,
· The suppliers customers are fragmented, so their bargaining power is low,
· The switching costs from one supplier to another are high,
In such situations, the buying industry often faces a high pressure on margins from their
suppliers. The relationship to powerful suppliers can potentially reduce strategic options for
the organization.
Bargaining Power of Customers
Similarly, the bargaining power of customers determines how much customers can impose
pressure on margins and volumes.
Customers bargaining power is likely to be high when
· They buy large volumes, there is a concentration of buyers,
· The supplying industry comprises a large number of small operators
· The supplying industry operates with high fixed costs,
· The product is undifferentiated and can be replaces by substitutes,
· Switching to an alternative product is relatively simple and is not related to high costs,
Threat of New Entrants
The competition in an industry will be the higher; the easier it is for other companies to enter
this industry. In such a situation, new entrants could change major determinants of the market
environment (e.g. market shares, prices, customer loyalty) at any time. There is always a latent
pressure for reaction and adjustment for existing players in this industry.
The threat of new entries will depend on the extent to which there are barriers to entry. These
are typically
Economies of scale (minimum size requirements for profitable operations),
· High initial investments and fixed costs,
· Cost advantages of existing players due to experience curve effects of operation with fully
depreciated assets,
· Brand loyalty of customers
· Protected intellectual property like patents, licenses etc,
· Scarcity of important resources, e.g. qualified expert staff
Threat of Substitutes
A threat from substitutes exists if there are alternative products with lower prices of better
performance parameters for the same purpose. They could potentially attract a significant
proportion of market volume and hence reduce the potential sales volume for existing players.
This category also relates to complementary products.
Similarly to the threat of new entrants, the threat of substitutes is determined by factors like
· Brand loyalty of customers,
· Close customer relationships,
· Switching costs for customers,
· The relative price for performance of substitutes,
· Current trends.
 Unit2:
Merger Process: Procedure for effecting M & A-Five-stage model–Due diligence–Types,
process and challenges of due diligence-HR aspects of M & A–Tips for successful mergers-
Process of merger integration. (Theory).

Merger Process:
Steps in Merger or Merger Process
1. Screening and investigation of merger proposal
2. Negotiation stage
3. Approval of proposal by Board of Directors
4. Approval of shareholders
5. Approval of creditors/financial institutions/banks
6. Tribunal’s approval
7. Approval of central government
8. Integration stage

1. Screening and investigation of merger proposal

When there is an intention of acquisition or merger, the primary step is that of screening. The
motives and the needs are to be adjudged against three strategic criteria i.e. business fit,
management and financial strength. If the proposal is viable after thorough analysis from all
angles, then the matter will be carried further.
2. Negotiation stage
In this stage the bargain is made in order to secure the highest price by the seller and the acquirer
keen to limit the price of the bid. The seller needs to decide the minimum price acceptable and
the buyer needs to decide the maximum he is prepared to pay. After the consideration is decided
then the payment terms and exchange ratio of shares between the companies will be decided.
The exchange ratio is an important factor in the process of amalgamation.
3. Approval of proposal by Board of Directors
Deciding upon the consideration of the deal and terms of payments, then the proposal will be
put for the Board of Director’s approval.
4. Approval of shareholders
As per the provisions of the Companies Act 1956, the shareholders of both seller and acquirer
companies hold meeting under the directions of the National Company Law Tribunal and they
consider the scheme of amalgamation. A separate meeting for both preference and equity
shareholders is convened for this purpose.
5. Approval of creditors/financial institutions/banks
Approvals from the constituents for the scheme of merger and acquisition are required to be
sought for as per the respective agreement with each of them and their interest is considered in
drawing up the scheme of merger.
6. Tribunal’s approval
The tribunal shall issue orders for winding up of the amalgamating company without
dissolution on receipt of the reports from the Official Liquidator and the Regional Director that
the affairs of the amalgamating company have not been conducted in a manner prejudicial to
the interest of its members or to public interest.
7. Approval of central government
It is required to obtain declaration of the Central Government on the recommendation made by
the Specified Authority under section 72 A of the Income Tax Act, if applicable.
8. Integration stage
The structural and cultural aspects of the two organization, will lead to successful merger and
ensure that expected benefits of the merger are realized.
The M&A process is more often than not a long process full of details, personalities, and
decisions. The larger the target company, the more complicated the process.
OR
Stages in Merger process
1. Identifying target
2. Narrowing the field of choice
3. Selecting first choice companies
4. Reviewing regulatory compliance
5. Conducting preliminary discussions
6. Signing a letter of intent
7. Conducting due diligence
8. Completing the financial negotiations
9. Signing the definitive agreement
10. Announcing the deal
11. Closing the transaction
12. Integration of companies

Dynamics of M&A process –

Identification of Targets
Negotiation
Closing the Deal.

The Five Stage (5-S) Model

The M&A process can be divided into five stages:
1. Corporate Strategy Development
2. Organizing for acquisitions
3. Deal structuring and negotiation
4. Post-acquisition integration and
5. Post-acquisition Audit and organizational learning.

Stage 1
Corporate Strategy Development
Corporate strategy is concerned with ways of optimizing the portfolios of businesses that a firm
currently owns and with how this portfolio can be changed to serve the interests of the
corporation’s stakeholders. M&A is one such activity which achieves the objectives of both
corporate and business strategies.
Corporate strategies are based on various models like industry structure driven, competition
among strategic groups, competence or resource based competition, etc. firms make
acquisitions to gain market power, gain economies of scale and scope or internalize vertically
linked operations to save on cost of dealing with markets, this adding further cost savings.

Stage 2
Organizing for Acquisition
A precondition for a successful acquisition is that the firm organizes itself for effective
acquisition making. An understanding of the acquisition decision process is important, since it
has a bearing on the quality of the acquisition decision and its value creation logic.
A frame work is developed for effective organization of the M&A function. The aim of this
framework is to develop the acquisition function as an important organizational capability and
as a core competence of the firm.
At this stage the firm lays down the criteria for potential targets of acquisitions consistent with
the strategic objectives and value creation logic of the firm’s corporate strategy and business
model.

Stage 3
Deal Structuring and Negotiating
This stage consists of
Valuing target companies, taking into account how the acquirer plans to leverage its own assets
with those of the targets.
Choice of advisors to the deal such as investment bankers, lawyers etc.
Performing due diligence
Determining the range of negotiation parameters
Negotiating the positions of senior management of both the firms in the post merger firm
Developing the appropriate bid and defence strategies and tactics within the parameters set by
relevant regulatory regime, etc.

Stage 4
Post Acquisition Integration
This is a very important stage, the objectives of which is to put in place a merged organization
that can deliver the strategic and value expectations that drove the merger in the first place.
Integration has the characteristics of a change management programme but here three types of
change may be involved:
Change of the target firm
Change of the acquiring firm
Change in the attitude and behavior of both to accommodate co-existence or fusion of the two
firms.

Stage 5
Post Acquisition Audit & Organization Learning
The importance of organizational learning to the success of future acquisitions needs much
greater recognition, given the high failure rate of acquisitions.
Post merger audit by internal auditors can be acquisition specific as well as being part of an
annual audit. Internal auditors have a significant role in ensuring organizational learning and
its dissemination.
Due Diligence
Due diligence is nothing but a detailed evaluation. Once a proposal has passed through initial
screening, it is subjected to a detailed evaluation or due diligence process.
Due diligence is a thorough examination of all critical aspects of the business subject to the
transaction. Due diligence is usually the most time consuming nerve wracking and expensive
stage of the M&A process.
Due diligence plays a decisive role in any transaction process.

Types of due diligence

1. Financial due diligence
2. Legal due diligence
3. Strategic due diligence
4. Tax due diligence
5. Environmental due diligence
6. Commercial due diligence

Financial Due Diligence

Financial evaluation is the most important part of the due diligence. It is needed to determine
the earnings and cash flows, areas of risk, the maximum price payable to the target company
and the best way to finance the merger. A merger is said to be at a premium when the offer
price is higher than the target firm’s pre-merger market value. The acquiring firm may pay the
premium if it thinks that it can increase the target firm’s profits after merger by improving its
operations and due to synergy.

Legal Due Diligence

Any M&A activity needs a lot of structuring such that they are within the tax and legal frame
work. Any merger to happen successfully, has to be structured in such a way that they are tax
efficient, compliant with SEBI, FDI, Capital Market and Government rules and regulations.

Strategic Due Diligence

It tests the strategic rationale behind a proposed transaction with two broad questions:
1. Is the deal commercially attractive?
2. Are we capable of realizing the targeted value?

The first question testing the commercial attractiveness of the deal involves validating both the
target company’s financial projections and identified synergies using an external lens.
Regarding the second question, a company must make a hard internal examination of whether
the targeted value of the deal can be realized by the management team of the combined
enterprise and, if so, whether the projected time frame is realistic.

Due diligence process

1. Internal information resources
2. Planning
3. Team
4. Realization
5. Documentation
Due diligence challenges
Due diligence involves assessing important characteristics of the target, like its financial
condition, management capabilities, physical assets and other intangible assets.
Due diligence process should help the acquiring firm avoid paying too high a premium or
making an inappropriate acquisition.

Managerial Challenges of Mergers and Acquisition

1. Challenges in competitive strategy planning
Acquisitions are a mean to achieving the corporate strategy aims of improving the firm’s
competitive positioning in its chosen markets on a sustainable basis. An important
consideration in developing competitive strategies and business models is the expected reaction
of the firm’s competitors. The firms may adopt given strategies as either first movers or “me-
too” followers. Both approaches have associated risks as well as opportunities. In some
situations the first mover gathers the “winner-takes-all” booty but the risk of failure may be
high. The second mover can reap the benefit of vicariously learning from the mistakes and
failures of the first mover.
2. Challenges in Organizing for Acquisitions
A number of factors impart a momentum to acquisition decision and deal making the individual
players may find difficult to control. Companies and key decision makers need to be conscious
of these pressures and pulls and not allow them to over whelm the logic of the deal. Otherwise
the deal will turn out to be a sub optional one and will lead to value destruction. This
emphasizes the importance of establishing an acquisition function or the A Team.
3. Challenges in Deal Structuring and Negotiation
There are a number of potential risks concerned with the deal-structuring and negotiation stage.
Selection of an acquisition team lacking in balance of expertise from operations, laws, human
resources management and other relevant functions to carry out negations or hostile bids if
necessary and engaging advisers with little relevant experience or standing may lead to a costly
and aborted acquisition attempt.
4. Challenges in Post-acquisition Integration
The post-acquisition integration stage is intended to implement the acquisition’s strategic and
financial goals. In practice, there may be a ‘disconnect’ between the previous stages and this
stage because there is a lack of continuity between the A team that developed the acquisitions
strategy and guided the negotiation on the one hand and the integration teams mainly involving
operations managers on the other. The disconnect may also arise from poor articulation of the
strategic goals and how organizational transformation would achieve them.
5. Challenges in Post-acquisition Audit and Organizational learning
The audit may, if carried out, provide inadequate assessment of performance due to poor
performance metrics or over-ambitious timescale for delivery of performance. As a result, there
may be no clear identification of reasons for success or failure. The post acquisition audit
process may also be characterized by lack of effective communication strategies to
communicate the lessons from acquisitions to managers not only of business units concerned
but also managers and directors concerned with acquisitions and corporate strategy.

Tips for successful mergers

Evaluate Your Liquidity And Financial Capability
Put Together A Team
Initiate A Target Search
Have An Acquisition Plan
Establish Effective Communication Channels
Internal communications
External communications

Merger Integration
The integration plan is typically prepared by the acquirer’s management; however,
participation of the targets key personnel in finalizing the plan can tremendously improve its
success.

Process of merger integration

1. Start up phase
2. Project implementation phase
3. Business transformation phase

Organizational aspects of merger integration

1. Individual level
2. Corporate level
Cultural aspects of merger integration
Corporate culture describes shared values, symbols, structures and ways of work within a
certain company and is a strong element of identity for the stakeholders of that company,
especially its employees.
As the cultural integration is a difficult and time consuming process which relies on the
commitment and acceptance of all effected stakeholders.
 Unit4:
Accounting aspects of Amalgamation: Types of amalgamations (Amalgamation in the nature
of merger and amalgamation in the nature of purchase)-Methods of Accounting-Pooling of
interest method and Purchase method)–Calculation of purchase consideration-Journal entries
in the books of transferor & transferee company-Ledger accounts in the books of transferor
and transferee companies. (Theory and Problems).

Amalgamation
Definition:
Halsubury’s Law of England describe amalgamation as “blending of two or more existing
undertaking into one undertaking, the shareholders of each blending company becoming
substantially the shareholders in the company which is to carry on the blended undertaking.
There may be amalgamation either by transfer of two or more undertakings to a new company
or by the transfer of one or more undertakings to an existing company.

Types of Amalgamation
The amalgamation in the nature of (i) merger or (ii) purchase.
Distinction between merger and purchase
In an amalgamation which is in the nature of merger, there is a genuine pooling not merely of
the assets and liabilities of the amalgamating companies but also of the shareholders’ interest
and of the business of these companies. The accounting treatment of such an amalgamation
should ensure that the resultant figures of assets, liabilities, capital and reserves more or less
represent the sum of the relevant figures of the amalgamating companies.
An amalgamation in the nature of purchase is in effect a mode by which one company acquires
another company. As a consequence, the shareholders of the transferor (acquired) company
normally do not continue to have a proportionate share in the equity of the transferee
(acquiring) company. Actually, it may not be intended to continue the business of the transferor
company.
Methods of Accounting for Amalgamation
There are two methods of accounting for amalgamations, namely
(i) the pooling of interest’s method and (ii) the purchase method.

(i) The pooling of interest’s method

This method is followed in case of an amalgamation in the nature of merger. Under this method,
the assets, liabilities and reserves of the transferor company are recorded by the transferee
company at their existing carrying amounts and in the same form as at the date of
amalgamation. The difference between the amount recorded as share capital issued plus any
additional consideration in the form of cash or other assets on the one hand and the amount of
share capital of the transferor company on the other hand is adjusted in reserves.

(ii) The purchase Method

This method is followed in case of an amalgamation in the nature of purchase. Under this
method, the transferee company accounts for the amalgamation either by incorporating the
assets and liabilities of the transferor company at their existing carrying amounts or by
allocating the consideration to individual identifiable assets and liabilities of the transferor
company on the basis of their fair values at the date of amalgamation.
The reserves of the transferor company, other than the statutory reserves, are not included in
the financial statements of the transferee company. Any excess of the amount of the
consideration over the value of the net assets of the transferor company acquired by the
transferee company is recognized in the transferee company’s books of account as goodwill
arising on amalgamation. If the amount of the consideration is lower than the value of net
assets acquired, the difference is credited to capital reserve
Consideration
For the purpose of accounting for amalgamation, Accounting Standard 14 (AS-14) defines the
term ‘consideration’ as “aggregate of the shares and other securities issued and payment made
in the form of cash or other assets by the transferee company to the shareholders of the
transferor company”. The amount depends on the terms of the contract between the transferor
company and the transferee company.

Methods of Consideration
Lump-sum Method
It is the simplest method. In it, the consideration is stated as a lump-sum. For example, it may
be stated that P Ltd. takes over the business of S Ltd. for Rs.50,00,000. Here, the sum of
Rs.50,00,000 is the consideration.

Net Assets Method

Under this method, the consideration is arrived at by adding the agreed values of all the assets
taken over by the transferee company and deducting there from the agreed values of the
liabilities taken over by the transferee company. The agreed value means the amount at which
the transferor company has agreed to sell and the transferee company has agreed to take over
a particular asset or a liability.

Net Payment Method

Under this method, consideration is ascertained by adding up the cash paid, agreed value of
assets given and the agreed values of the securities allotted by the transferee company to the
transferor company in discharge of consideration. Suppose P Ltd. for business taken over from
S Ltd. agrees to pay Rs.5,00,000 in cash and allot to S Ltd. 4,00,000 equity shares of Rs.10
each fully paid at an agreed value of Rs.15 per share. In this case, the consideration will be
Rs.65,00,000(5,00,000 + 60,00,000).

Intrinsic Worth Method

Consideration may have to be calculated on the basis of the agreed value of shares of the
transferor company. That consideration amount will be discharged through allotting shares of
transferee company to the transferor company. Suppose P Ltd. takes over the business of S Ltd.
and it is agreed between S Ltd. and P Ltd. that the value of one share of S Ltd. is Rs.13( paid
up value is Rs.10 per share for 60,000 shares). Then, the consideration is
Rs.13*60,000=Rs.78,00,000. This amount will be discharged through allotting shares of P Ltd.
to S Ltd. One share value of P Ltd.
Is Rs.25 (paid up value is Rs.10 per share). So, P Ltd. will allot Rs.78,00,000/25=3,12,000
shares to S Ltd. This is called intrinsic worth method.
Accounting for amalgamation -procedure laid down under Indian companies act of 1956
Laws Regulating Merger
Following are the laws that regulate the merger of the company: - (I) The Companies Act ,
1956 Section 390 to 395 of Companies Act, 1956 deal with arrangements, amalgamations,
mergers and the procedure to be followed for getting the arrangement, compromise or the
scheme of amalgamation approved. Though, section 391 deals with the issue of compromise
or arrangement which is different from the issue of amalgamation as deal with under section
394, as section 394 too refers to the procedure under section 391 etc., all the section are to be
seen together while understanding the procedure of getting the scheme of amalgamation
approved. Again, it is true that while the procedure to be followed in case of amalgamation of
two companies is wider than the scheme of compromise or arrangement though there exist
substantial overlapping.
 Unit 5:
Acquisitions/Takeovers: Meaning and types of acquisition/takeovers (Friendly and Hostile
takeovers)-Anti-takeover strategies-Anti-takeover amendments-Legal aspects of M & A-
Combination and Competition Act- 2002Competition Commission of India (CCI)-The SEBI
Substantial Acquisition of Shares and Takeover (Takeover code-2011). (Theory).

Takeovers
Definition
Takeovers may be defined as “ A transaction or series of transactions whereby an individual or
group of individuals or company acquires control over the management of the company by
acquiring equity shares carrying majority voting power”.
Takeover is an acquisition of shares carrying voting rights in a company with a view to gaining
control over the assets and management of the company. In takeover, the seller management is
an unwilling partner and the purchaser will generally resort to acquire controlling interest in
shares with very little advance information to the company which is being bought.
It means the purchase of one company by another without the formation of a new company.
A business transaction whereby a person acquires control over the assets of the company, either
directly by becoming the owner of those assets or indirectly by obtaining control of the
management of the company.
If shares totaling 51% of the total value of capital are held by the acquirer and his associates,
the takeover is complete and the acquirer gets the status similar to that of a holding company.
Most of the corporate there exists a concept called controlling interest.
Controlling Interest
It is the proportion of the total shareholding which results in control of the administration of
the company through a majority in the Board of Directors.

Types of Takeover
1.Friendly Takeovers
In a friendly takeover, the acquirer will purchase the controlling shares after thorough
negotiations and agreement with the seller.
The consideration is decided by having friendly negotiations.
The takeover bid is finalized with the consent of majority shareholders of the target company.
This form of purchase is also called as “consent takeover”.

2. Hostile Takeovers
A person seeking control over a company, purchase the required number of shares from non-
controlling shareholders in the open market.
This method normally involves purchasing of small holdings of small shareholders over a
period of time at various places.
As a strategy the purchaser keeps his identity a secret.
Also called as “VIOLENT TAKEOVER”.

3. Bailout Takeover
These forms of takeover are resorted to bailout the sick companies to allow the company for
rehabilitation as per the schemes approved by the financial institutions.
The lead financial institutions will evaluate the bids received for acquisitions, the financial
position and track record of the acquirer.

4.Reverse takeovers
A "reverse takeover" is a type of takeover where a private company acquires a public company.
This is usually done at the instigation of the larger, private company, the purpose being for the
private company to effectively float itself while avoiding some of the expense and time
involved in a conventional IPO. However, in the UK under AIM rules, a reverse take-over is
an acquisition or acquisitions in a twelve-month period which for an AIM company would:
exceed 100% in any of the class tests; or
result in a fundamental change in its business, board or voting control; or
in the case of an investing company, depart substantially from the investing strategy stated in
its admission document or, where no admission document was produced on admission, depart
substantially from the investing strategy stated in its pre-admission announcement or, depart
substantially from the investing strategy.
An individual or organization, sometimes known as corporate raider, can purchase a large
fraction of the company's stock and, in doing so, get enough votes to replace the board of
directors and the CEO. With a new agreeable management team, the stock is a much more
attractive investment[why?], which would likely result in a price rise and a profit for the
corporate raider and the other shareholders.

5.Backflip takeovers
A "backflip takeover" is any sort of takeover in which the acquiring company turns itself into
a subsidiary of the purchased company. This type of takeover can occur when a larger but less
well-known company purchases a struggling company with a very well-known brand.
Examples include:
The Texas Air Corporation takeover of Continental Airlines but taking the Continental name
as it was better known.
The SBC takeover of the ailing AT&T and subsequent rename to AT&T.
Westinghouse's 1995 purchase of CBS and 1997 renaming to CBS Corporation, with
Westinghouse becoming a brand name owned by the company.
NationsBank's takeover of the Bank of America, but adopting Bank of America's name.

Takeover process
1. Manage the pre-acquisition phase
2. Screen candidates
3. Evaluate the remaining candidates
4. Determine the mode of acquisition
5. Negotiate and consummate the deal
6. Manage the post acquisition intergration

Pros and cons of takeover

While pros and cons of a takeover differ from case to case, there are a few reoccurring ones
worth mentioning.
Pros:
1. Increase in sales/revenues (e.g. Procter & Gamble takeover of Gillette)
2. Venture into new businesses and markets
3. Profitability of target company
4. Increase market share
5. Decreased competition (from the perspective of the acquiring company)
6. Reduction of overcapacity in the industry
7. Enlarge brand portfolio (e.g. L'Oréal's takeover of Body Shop)
8. Increase in economies of scale

Cons:
1. Goodwill, often paid in excess for the acquisition
2. Culture clashes within the two companies causes employees to be less-efficient or
despondent
3. Reduced competition and choice for consumers in oligopoly markets (Bad for consumers,
although this is good for the companies involved in the takeover)
4. Likelihood of job cuts
5. Cultural integration/conflict with new management
6. Hidden liabilities of target entity
7. The monetary cost to the company

Anti-takeover strategies
Defence Tactics used by target Company :
Crown Jewels
Poison Pill
People Pill
Pac man
Green Mail
White Nights
Grey Knight
Golden Parachutes
White Square

Crown Jewels – the target company sells its highly profitable or attractive business or division
(called crown jewels) to make the takeover bid less attractive to the raider.
Posion Pill – this is a strategy which upon a successful acquisition by the acquirer, would create
a negative financial result and value reduction for acquirer.
People pill – in this tactic, the current management team, key employees threaten to quit an
masse in the event of a hostile takeover. This can be an effective defence in certain specific
cases and situations.
Pacman – the target company or its promoters start acquiring sizeable holding in the
acquirer/rider company, threatening to acquire the rider itself. This makes the acquirer run for
cover and forces him to hammer out a truce.
Green mail – the target company or the existing promoters arrange through friendly investors
to accumulate large stock of its shares with a view to raise its market price. This makes the
takeover very expensive for the raider. In India this is possible; however, if it is done in such a
manner that the nexus between the existing promoters and friendly investors who are
accumulating the stock is proved, it may trigger an open offer by the existing promoters
themselves.
White mail - is another takeover defense strategy wherein the target company issues a large
number of shares at a price quite below the market price to a friendly party. This forces the
acquiring company to purchase these shares from the third parties to complete the takeover.
This discourages the takeover as it becomes more difficult and expensive as the rider has to
purchase shares from parties friendly to the target company.
Shark Repellent – in this case, the target company makes special amendments to its bylaws
that become active only when a takeover attempt is announced. The objective of these special
amendments is to make the takeover less attractive to the acquirer. Shark repellent is a repellent
applied by deep sea divers to prevent sharks from attacking them. In a takeover situation, the
acquirer is a shark and the proposed amendments repel the shark to prevent the attack.
White knight – in this tactics, the target company or its existing promoters enlist the services
of another company or group of investors to act as a white knight who actually takes over the
target company, thereby foiling the bid of the raider and retaining the control of existing
promoters. This is possible in India.
White Squire – a white is similar to a white knight. The only difference is that a white square
exercises a significant minority stake, as opposed to a majority stake. A white squire does not
have any intention of getting involved in the takeover battle, but serves as a figurehead in
defending the target in a hostile takeover. The white squire enjoys special voting rights for the
equity stake that it holds in the company.
Grey Knight – in this tactics, the services of a friendly company or a group of investors are
engaged to acquire shares of the raider itself to keep the raider busy defending himself and
eventually force a truce. This is also possible in India.
Golden Parachute – in this, a contractual guarantee of a fairly large sum of compensation is
issued to the top or senior executives of the target company whose services are likely to be
terminated in case the takeover succeeds.

Anti-Takeover amendments
It is often proposed that the best defense mechanism is anti-takeover amendments to the
company’s article of association, popularly called shark repellants.
Overall approach is to highlight the critical issues of this defensive mechanism used by
companies, the impact of anti-takeover amendment on the financial performance and long-term
managerial decision making.
Types of anti-takeover amendments
1. Staggered board amendments
2. Supermajority provisions
3. Fair price provisions
4. Dual capitalization

Legal aspects of Mergers/amalgamations and acquisitions/takeovers:

Combination and Competition Act
Background: The Government of India (GOI) have issued notifications on 4 March 2011 to
bring into force, from 1 June 2011, the provisions of sections 5, 6, 20, 29, 30 and 31 of the
Competition Act 2002 (the Act). Section 5 of the Act contains provisions relating to
“Combination” and Section 6 of the Act contains provisions relating to “Regulations of
Combinations”.
Sections 20, 29, 30 and 31 of the Act contain procedural provisions relating regulations of the
Combination. GOI has, in consultation with the Competition Commission of India (CCI) – the
regulator appointed under the Act – enhanced by 50% the threshold of monetary limit of
“assets” and “turnover” under Section 5 of the Act for reckoning ‘Combination’.

Meaning of Combination
As per the Act, a ‘Combination’ comprises of any of the following –
• Any acquisition of – control / shares / voting rights / assets of enterprises
• acquiring of control by person over an enterprises, where such person already has direct /
indirect control over another enterprise engaged in similar / competitive business.

The Competition Act ,2002

Following provisions of the Competition Act, 2002 deals with mergers of the company:- (1)
Section 5 of the Competition Act, 2002 deals with “Combinations” which defines combination
by reference to assets and turnover
(a) Exclusively in India and
(b) in India and outside India
For example, an Indian company with turnover of Rs. 3000 crores cannot acquire another
Indian company without prior notification and approval of the Competition Commission. On
the other hand, a foreign company with turnover outside India of more than USD 1.5 billion
(or in excess of Rs. 4500 crores) may acquire a company in India with sales just short of Rs.
1500 crores without any notification to (or approval of) the Competition Commission being
required. (2) Section 6 of the Competition Act, 2002 states that, no person or enterprise shall
enter into a combination which causes or is likely to cause an appreciable adverse effect on
competition within the relevant market in India and such a combination shall be void. All types
of intra-group combinations, mergers, demergers, reorganizations and other similar
transactions should be specifically exempted from the notification procedure and appropriate
clauses should be incorporated in sub-regulation 5(2) of the Regulations. These transactions do
not have any competitive impact on the market for assessment under the Competition Act,
Section 6.

Competition Commission of India (CCI)

The Competition Commission of India (CCI) was established under the Competition Act, 2002
for the administration, implementation and enforcement of the Act, and was duly constituted
in March 2009. The following are the objectives of the Commission.
1. To prevent practices having adverse effect on competition.
2. To promote and sustain competition in markets.
3. To protect the interests of consumers and
4. To ensure freedom of trade
Consequent upon a challenge to certain provisions of the Act and the observations of the
Hon'ble Supreme Court, the Act was amended by the Competition (Amendment) Act, 2007.
The Monopolies and Restrictive Trade Practices Act, 1969 [MRTP Act] repealed and is
replaced by the Competition Act, 2002, with effect from 01st September, 2009 [Notification
Dated 28th August, 2009].
Competition Commission of India is a body of the Government of India responsible for
enforcing The Competition Act, 2002throughout India and to prevent activities that have an
adverse effect on competition in India. It was established on 14 October 2003. It became fully
functional in May 2009 with Dhanendra Kumar as its first Chairman.

CCI Procedure in Regard to the transactions of Business Relating to combination of

Regulations 2011
The Competition Commission of India (“CCI”) has amended the Competition Commission of
India (Procedure in regard to the transaction of business relating to combinations) Regulations,
2011 (Combination Regulations). A notification in respect was issued by the CCI on March
28, 2014.
Whilst the latest amendment has various interesting changes from a practical and commercial
perspective, the biggest and most important amendment that the notification specifies is the
fact that the CCI has tightened its rules to ensure that companies do not escape its scrutiny
through innovative structuring of mergers and acquisitions.
(a) Filing of a combination notification to be determined by the substance /intent of
transactions
(b) Notification in relation to transactions taking place outside of India
(c) Amendment to Form I and Form II
(d) Increase in filing fee
(e) Right of appeal

SEBI Takeover Code

As per recommendations of Justice P N Bhagwati committee and was incorporated in the SEBI
Regulation Act, 1977.

It is a set of guidelines given by SEBI relating to regulations of mergers and takeovers. The
salient features of the takeover code are as explained as under:
Disclosure of holdings.
Public announcement and open offer.
Offer price.
Disclosure.
Content of the offer document.

1. SEBI Takeover Code – Disclosure of holdings

If an acquirer holding 5%-14% wants to acquire share in a target company, he is bound to
disclose such holding to target company or stock exchange within 2 days of acquisition.
If he is holding 15%-75% wants to purchase/sell share aggregating to 2% or more, he is bound
to disclose such holdings to target company within 2 days of such acquisition.
If he is holding more than 15% shares and a promoter and person having control shall disclose
his aggregate shareholding within 21 days before, 31st March to the target company.

2. Public announcement and open offer:

Any acquirer intending to hold shares (other than promoters holding) which entitle 15% voting
power can acquire such shares only after making public announcement to acquire at least 20%
voting power from shareholders through an open offer.
Acquirer holding more than 15% (other than promoters holding) but less than 75% of voting
rights which entitles 5% voting rights in any financial year can do so only after making public
announcement to acquire at least 20% shares of target company from shareholders through an
open offer.
Any acquirer holding more than 75% shares (other than promoters holding) can acquire further
share only after public announcement to acquire at least 20% shares from shareholders through
an open offer.

3. SEBI Takeover Code – Offer Price

In determining the offer price it has to be ensured that all relevant parameters as listed below
are taken into account:
Negotiated price under the agreement.
Price paid for acquisition
Average high and low prices of scripts of the acquiring company during the period needs to be
disclosed to the target company.

4. SEBI Takeover Code – Disclosure

The offer document for such takeover has to disclose the following details in a clear manner
Detailed terms of the offer.
Identity of the offer.
Details of offerors existing holdings in Target Company.

SEBI Takeover Code – Contents of the offer document

As per the law the offer document has to contain the following:
Offer’s financial info.
Intention to continue offeree’s business and to make major long term change and long term
commercial justification of the offer.

Salient features of SEBI takeover code

i. Notification of takeover:
If an individual or company acquires 5% or more of the voting capital of a company, the target
company and the stock exchange shall be notified immediately.
ii. Limit to share acquisition:
An individual or a company can continue acquiring the shares of another company without
making any offer to other shareholders until the individual or the company acquires 15% of the
voting capital.
iii. Public offer:
If the holding of the acquiring company exceeds 15%, a public offer to purchase a minimum
of 20% of the shares shall be made to the remaining shareholders through a public
announcement.
iv. Offer price:
Once the offer is made to the remaining shareholders, the minimum offer price shall not be less
than the average of the weekly high and low of the closing prices during the last 6 months
preceding the date of announcement.
v. Disclosure:
The offer should disclose the detailed terms of the offer, identity of the offer details of the
offeror’s existing holdings in the offeree company etc., and the information should be made
available to all the shareholder’s at the same time and in the same manner.
vi. Offer document:
This offer document should contain the offerer’s financial information, it’s intensions to
continue the offeree company’s business and to make major change and long term commercial
justification for the offer
In September 2011, SEBI declared an overhaul SEBI (Substantial Acquisitions of Shares and
Takeover) Regulations 1997 by introducing the 2011 regulations. The Regulation was mainly
added to regulate the acquisition of shares and voting rights in Public Listed Companies in
India. The various changes made in the new regulations is traceable to the recommendations
of a committee which was mainly set up to evaluate the many provisions mentioned in the 1997
rules.

Key Changes made in SEBI Takeover Regulation

Trigger Point
Mandatory Open Offer
Delisting Offer
Modifications Made on the Voluntary and Open Offers
Modification on the increase in the Offer size from 20% to 26%
Public Announcement
Short Public Announcement
Judicial Decisions made on "Control"
 Unit 6:
Corporate Restructuring: Meaning, significance and forms of restructuring–sell-off, spin-
off, divestitures, demerger, Equity Carve Out (ECO), Leveraged Buy Outs (LBO),
Management Buy Out (MBO), Master Limited Partnership (MLP), Limited Liability
Partnership (LLP) and joint ventures. (Theory).

Corporate restructuring
Corporate restructuring refers to the changes in ownership, business mix, asset mix & alliance
with a view to enhance the shareholders’ value. Hence, corporate restructuring may involve
ownership restructuring, business restructuring, asset restructuring for the purpose of making
it more efficient and more profitable.
A company can affect ownership restructuring through mergers & acquisitions, leveraged buy
outs, buy back of shares, spin-offs, joint venture & strategic alliance.
Business restructuring involves the reorganization of business units or divisions. It includes
diversification into new businesses, out sourcing, divestment, brand acquisitions etc.
Asset restructuring involves the acquisition or sale of asset & their ownership structure. E.g.
Sale & lease back of assets, securitization of debts, receivable factoring, etc.

Purpose of Corporate Restructuring

The basic purpose is to enhance the shareholder value.
The company should continuously evaluate its portfolio of businesses, capital mix & ownership
& assets arrangements to find opportunities to increase the share holders’ value.
It should focus on asset utilization & profitable investment opportunities, & reorganize or
divest less profitable or loss-making businesses/products.
The company can also enhance value through capital restructuring; it can innovate securities
that help to reduce cost of capital.

Significance
Limit competition
Utilize under-utilised market power
Overcome the problem of slow growth and profitability in one’s own industry
Achieve diversification
Gain economies of scale and increase income with proportionately less investment
Establish a transnational bridgehead without excessive start-up costs to gain access to a foreign
market
Utilize under-utilised resources- human and physical and managerial skills
Displace existing management
Circumvent government regulations
Forms of Corporate Restructuring

Forms of
corporate
restructuring

Portfolio Financial Organizational

restructuring restructuring restructuring

Portfolio Restructuring Financial Restructuring

Divestment/Di Expansion Change in Corporate

vestitures ownership control

Sell –off Mergers Exchange offer Buyback of

shares

Demerger Takeovers Employee’s stock

ownership

Equity carve Joint venture Going private

out

Slump sale Strategic MBO

alliances
Liquidation Franchising LBO

Holding Master limited

companies partnership MLP

Intellectual Limited liability

property rights partnership LLP

Different Methods of Corporate Restructuring

• Joint Venture
• Divestitures
• Corporate sell-off
• Corporate spin-off
• Equity Carve Out
• Leveraged Buyout
• Management buyouts
• Master Limited partnerships
• Employee Stock ownership plans
Joint Venture
A joint venture is a business enterprise under-taken by two or more persons or organizations
to share the expense and profit of a particular business project.
Eg. Maruthi Suzuki, ING Vishya, Bajaj Allianz, Standard & Charted Bank.
A Joint venture is a legal entity formed between two or more parties to under-take economic
activity together. The parties agree to create a new entity by both contributing equity, and they
then share in the revenues, expenses, and control of the enterprise. The venture can be for one
specific project only, or a continuing business relationship such as the Sony Ericsson joint
venture. This is in contrast to a strategic alliance, which involves no equity stake by the
participants, and is a much less rigid arrangement.

Rational behind JV:

Pooling of complimentary resources
Access to raw-materials
Access to new markets
Diversification of risks
Economies of scale
Tax shelter
Cost reduction
Purchaser- supplier relationships
Joint manufacturing

Types of Joint Ventures

Equity based joint ventures benefit foreign and/or local private interests, groups of interests,
or members of the general public.
Under non-equity joint ventures (also known as cooperative agreements), meanwhile, the
parties seek technical service arrangements, franchise and brand use agreements, management
contracts, rental agreements, or one-time contracts, e.g. for construction projects. Participants
do not always furnish capital as part of their joint venture commitments. They want to
modernize operations or start new production operations.
E.g. BIAL- Bangalore International Airport Ltd. is a joint venture between Central Govt., State
Govt. & Switzerland Airport Authority.

Reasons for Failure of JV

Lower than expected turnover.
Expiry of Technical tie up.
Economic Recession.
Reluctance of Management to accept additional responsibility.
Distance and language barrier.
Unfavourable profitability ratio – Post JV arrangement.
Lack of openers between JV constituents.

Strategic Alliance
Is a flexible arrangement between firms whereby they agree to work together to achieve a
specific goal. Such arrangements are looser in nature than the JV and can be disbanded easily.
A partnership with another business in which you combine efforts in a business effort involving
anything from getting a better price for goods by buying in bulk together, to seeking business
together, with each of you providing part of the product. The basic idea behind alliances is to
minimize risk while maximizing the leverage.
Normally, a strategic alliance does not result in the creation of new entity unlike a JV. The
major advantage of a strategic alliance is that it can be created easily as and when there is a
need.

DIVESTITURE / DEMERGER
Divestiture: Sale of segment of a company (assets, a product line, a subsidiary) to a third party
for cash and/or securities.
Although divestitures cause contraction from the perspective of selling firm, it doesn’t
however, entail decrease in its profits.
It is believed that, the value will be enhanced by parting / divesting / demerging some of its
assets as they are either causing losses or yielding very low returns

Motives of Divestitures
Raising Capital
It is a common motive. Cash strapped firms seem to resort to divestiture to shore up their
liquidity.
E.g. CEAT sold its nylon tyre cord plant at Gwalior to SRF for Rs. 3250 million so that it could
settle its out standings and raise funds to concentrate on tyre manufacturing.
Curtailment of losses
Prominent reason is to cut losses. It may imply that the unit that is proposed to be divested is
earning a sub normal rate of return.
Strategic Realignment
The sellers may divest a unit which no longer fits with its strategic plan. Often such a unit tends
to be in an unrelated line and may demand a lot of managerial time & attention.
Efficiency Gain
A divestiture results in an efficiency gain when the unit divested is worth more as part of some
other firm or as a standalone business.
Inability to adopt new technology.
Underperformance of Labor including managers.

Forms of Corporate Divestitures

• Inter-corporate sell-off: that is sale to another company
• Spin-off or de-merger
• Equity Carve out, in which a subsidiary is floated on a stock exchange, but parent, retains a
majority control.
• Issue of tracking stock
• Management buyout

1. Corporate sell-offs
A sell-off is a transaction between two independent companies. The divestor may benefit from
the cash proceeds, which could be put to more profitable use in the businesses within the group,
or used to mitigate financial distress.
Sell-off may also add to the divestor by eliminating negative synergy, or by realizing
managerial resource preempted by the divested business.
It may also sharpen the strategic focus of the remaining businesses & enhance the divestor’s
competitive strength.
Selling a part or all of the firm by any one of means: sale, liquidation, spin-off & so on . Or
General term for divestiture of part/all of a firm by any one of a no. of means: sale, liquidation,
spin-off and so on.

PARTIAL SELL-OFF/ SLUMP SALE

A partial sell-off/slump sale, involves the sale of a business unit or plant of one firm to another.
It is the mirror image of a purchase of a business unit or plant.
From the seller’s perspective, it is a form of contraction;
From the buyer’s point of view it is a form of expansion.
For example: When Coromandal Fertilizers Limited sold its cement division to India Cement
Limited, the size of Coromandal Fertilizers contracted whereas the size of India Cements
Limited expanded.

2. Corporate spin-offs
In a corporate spin-off, a company floats off a subsidiary which may be small part of the parent
company. The newly floated company now has an independent existence and is separately
valued at the stock market.
Shares in the spin-off company are distributed to the shareholders of the parent company; they
own shares in two companies rather than just one. The parent company does not receive any
proceeds from the demerger, as the demerged company’s shares are directly distributed to the
parent company shareholders.
A corporate spin-off divides a company into two or more independent firms, and offers a firm
an opportunity to improve managerial incentives with fresh compensation packages.
This is the reversal of mergers or acquisitions.
Denotes a transaction in which a company distributes on a pro-rata basis, all the shares of its
own in a subsidiary to its own shareholders.
EX: United Breweries (Flagship CO.) UB Holdings Ltd. For every 600 Shares held 400 Shares
are given.
In the year 1997, PepsiCo spun-off KFC, Pizza Hut and Taco Bell into a separate corporation
Tricon Global Restaurants Inc. The company spun-off 100% of its restaurant unit to stock
holders who received shares in the new company. The spin-off was aimed at better focus on its
Pepsi beverage operations and Frito Lay snack business.

Benefits for a spin-off

A spin off like other form of divestitures, lead to enhanced focus, reduced organizational
complexity & control loss, & avoid of negative synergy.
Eliminate the conglomerate discount the parent may have suffered as a diversified company.
Increase the transparency of both the parent & the spin-off business to the stock market through
separate financial reports of the two firms to current shareholders.
Split off
A transaction in which some, but not all, parent company shareholders receive shares in a
subsidiary in return for relinquishing(surrendering) their parent company shares. A split-off is
a type of corporate reorganization whereby the stock of a subsidiary is exchanged for shares in
the parent company. Split-off is basically of two types. In the first type, a corporation transfers
part of its assets to a new corporation in exchange for stock of the new corporation. The original
corporation then distributes the same stock to its shareholders, who, in turn, surrender part of
their stock in the original corporation. In the second type, a parent company transfers stock of
a controlled corporation to its stock holders in redemption of a similar portion of their stock.
“Control” refers to the ownership of 80% or more of the corporation whose shares are being
distributed.

Difference between Spin-off and Split-off

A split-off differs from spin-off in that the shareholders in a split-off must relinquish
(surrender) their shares of stock in the parent corporation in order to receive shares of the
subsidiary corporation, whereas the shareholders in a spin-off need not do so.

Split up
A transaction under which a company spins off all of its subsidiaries to its shareholders and
ceases to exist. In a split-up, the existing corporation transfers all its assets to two or more new
controlled subsidiaries, in exchange for subsidiary stock. The parent distributes all stock of
each subsidiary to existing shareholders in exchange for all outstanding parent stock, and
liquidates. In other words, a single company splits into 2 or more separately run companies.
One of the classical examples for split-up is the split-up of AT & T into four separate units-
AT & T Wireless, AT&T Broadband, AT & T Consumer, AT & T Business. It could be termed
as one of the biggest shake-ups in the US Telecommunication industry since 1984.

3. Equity Carve Out

An equity carve out is the initial public offering (IPO) of the some portion of the common stock
of a wholly owned subsidiary. These are also referred to as “split off IPO”.
An IPO of the equity of a subsidiary resembles a seasoned equity offering of the parent in that
cash is received from a public sale of equity securities.
An equity carve out is the sale of a minority or a majority voting control in a subsidiary by its
parent to outside investors.
Equity carve out is similar to a spin-off in many ways.
They are often motivated by the need to:
Increases the focus of the firm
Improves the autonomy of the component businesses
Improve the managerial incentive structure by relating management performance directly to
the share holder value.
Enhance the visibility of the component businesses being divested.
Minimize the conglomerate discount through this enhanced visibility & increased information.

Leveraged Buyout
Acquisition of one company by another, typically with borrowed funds. Usually, the acquired
company’s assets are used as collateral for the loans of the acquiring company.
The loans are paid back from the acquired company’s cash flow. Another possible form of
leveraged buyout occurs when investors borrow from banks, using their own assets as collateral
to acquire the other company. Typically, public stockholders receive an amount in excess of
the current market value for their shares.

Types of LBO
• Investment buyouts (IBO)
• Management buyouts (MBO)
• Management buy-in (MBI)
• Going private buyouts

1. Management Buyout
A management buyout (MBO) is a form of acquisition where a company’s existing managers
buy or acquire a large part of the company.
Purchase of all of a company’s publicly held shares by the existing mgt., which takes the
company private. Usually, mgt. Will have to pay a premium over the current market price to
entire public shareholders to go along with the deal. If mgt. has to borrow heavily to finance
the transaction, it is called a Leveraged Buyout (LBO)
Managers may want to buy their company for several reasons: They want to avoid being taken
over by a raider who would bring in new mgt., they no longer want the scrutiny that comes
with running a public company; or they believe they can make more money for themselves in
the long run by owning a larger share of the company, and eventually reap substantial profits
by going public again with a Reverse Leveraged Buyout

2. Management Buy-in
A management buy-in (MBI) occurs when a manager or a management team from outside the
company raises the necessary finance, buys it and becomes the company’s new management.
A management buy-in team often competes with other purchasers in the search for a suitable
business. Usually, the team will be led by a manager with significant experience at managing
director level.
Difference between MBO and MBI
The difference to a management buy-out is in the position of the purchaser: In the case of a
buy-out, they are already working for the company. In the case of a buy-in, however, the
manager or management team is from another source.

Going Private:
Converting a company whose stock is publicly held into a Private company. The transformation
of a public company into a pvt. Company is called as “Going Private”.

Master Limited Partnership

Master limited partnership is a limited partnership that is publicly traded on securities
exchange. It combines the tax benefits of a limited partnership with the liquidity of publicly
traded securities.
Master limited partnerships are limited by US Code to only apply to enterprises that engage in
certain businesses, mostly pertaining to the use of natural resources, such as petroleum and
natural gas extraction and transportation. Some real estate enterprises may also qualify as
MLPs.
In practice, MLPs pay their investors through quarterly required distributions (QRD), the
amount of which is stated in the contract between the limited partners (the investors) and the
general public (the managers). Failure to pay the QRD may constitute an event of default.
A group led by an executive of the company or members of a units management, buy out the
unit. They form a partnership but the shares of the partnership firm they form are traded. Since
the shares are traded in the market, the liabilities of the shareholders are limited. This is called
Master Limited Partnership (MLP).

Features of MLP:
► Limited Liability.
► Centralized Management.
► Longer Life (Partnership forever)
► Transferability of Stock.

Types of MLP’s
Roll up MLP: Combination of two or more partnerships forming one publicly traded
partnership.
Liquidation MLP: Formed by complete liquidation of a corporation and converting it into a
MLP.
Acquisition MLP: Formed by offering part of the MLP’s interest (shares) to public and using
the proceeds to purchase assets.
Roll out MLP: Formed by a corporation’s contribution of operating assets in exchange for
general and limited partnership interests (shares) of the MLP followed by a public offering of
limited partnership interest.

Advantages of MLPs
• Unlimited life
• Limited liability
• Centralized management
• Transferability
• Tax savings, avoids double taxation

EQUITY CARVE OUT AS A CORPORATE RESTRUCTURING

It is also known as partial spin off or Partial public offerings or split-off IPO.
SPIN OFF: occurs when the entire ownership of a subsidiary is divested as dividend to
shareholders
Equity carve out; are an IPO of a stake in a subsidiary. The parent usually keeps majority
ownership
Usually occurs when a co. decides to IPO one of their subsidiaries the co. usually only offers
a minority share to the equity market
DEFINITION: Diluting the ownership right of original or existing shareholders by issuing
new common stock (ordinary shares) of a firm to new investors. Equity Carve out, in which a
subsidiary is floated on a stock exchange, but parent retains a majority control.
Limited Liability Partnership (LLP) in India:
Nature Of Limited Liability Partnership (LLP)

1. Concept of “limited liability partnership”

LLP is an alternative corporate business form that gives the benefits of limited liability of a
company and the flexibility of a partnership.
The LLP can continue its existence irrespective of changes in partners. It is capable of entering
into contracts and holding property in its own name.
The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the
partners is limited to their agreed contribution in the LLP.

2. Structure of an LLP
LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual
succession.

3. Advantages of LLP form

LLP form is a form of business model which:
(i) is organized and operates on the basis of an agreement.
(ii) provides flexibility without imposing detailed legal and procedural requirements
(iii) enables professional/technical expertise and initiative to combine with financial risk taking
capacity in an innovative and efficient manner

Difference between LLP & “traditional partnership firm”

Under “traditional partnership firm”, every partner is liable, jointly with all the other partners
and also severally for all acts of the firm done while he is a partner.
Under LLP structure, liability of the partner is limited to his agreed contribution. Further, no
partner is liable on account of the independent or un-authorized acts of other partners, thus
allowing individual partners to be shielded from joint liability created by another partner’s
wrongful acts or misconduct.

De merger
A business strategy in which a single business is broken into components, either to operate on
their own, to be sold or to be dissolved. A de-merger allows a large company, such as a
conglomerate, to split off its various brands to invite or prevent an acquisition, to raise capital
by selling off components that are no longer part of the business's core product line, or to create
separate legal entities to handle different operations.
The act of splitting off a part of an existing company to become a new company, which operates
completely separate from the original company. Shareholders of the original company are
usually given an equivalent stake of ownership in the new company. A demerger is often done
to help each of the segments operate more smoothly, as they can now focus on a more specific
task. opposite of merger.

Buyback of shares
The repurchase of outstanding shares (repurchase) by a company in order to reduce the number
of shares on the market. Companies will buy back shares either to increase the value of shares
still available (reducing supply), or to eliminate any threats by shareholders who may be
looking for a controlling stake.
Buy-back of shares is a method of financial engineering. It can be described as a procedure
which enables a company to go back to the holders of its shares and offer to purchase the shares
held by them.

Objectives of Buy Back: Shares may be bought back by the company on account of one or
more of the following reasons
i. To increase promoters holding
ii. Increase earnings per share
iii. Rationalise the capital structure by writing off capital not represented by available assets.
iv. Support share value
v. To thwart takeover bid