Unit II:

Corporate Restructuring

MEANING OF CORPORATE RESTRUCTURING

Corporate restructuring may be defined as 'the process involved in changing the organisation of
business. It is the process of redesigning one or more aspects of a company. As per the Of Dictionary,
restructuring means to give a new structure to, rebuild or rearrange. Corporate restructure as per the
Collins English Dictionary, means a change in the business strategy of an organization re in
diversification, closing parts of the business, etc, to increase its long-term profitability. The price of
corporate restructuring may be implemented due to a number of factors, such as positioning of the
company to be more profitable, survive currently adverse economic conditions, to address challenges
and increase shareholder value. It is an attempt to move the organisation in entirely a new direction.
We can conclude that "corporate restructuring is the process of significantly changing a company's
business model management team or financial structure to address challenges and increase
shareholder value”.

NEED AND OBJECTIVES OF CORPORATE RESTRUCTURING

he objectives of corporate restructuring may be different for different companies and at differem
times. But the primary objective of corporate restructuring is to eliminate the inefficiencies and
increase shareholder value.
The broad objectives or needs of corporate restructuring include the following
1. To improve the competitive position of the company.
2. To rearrange the firm's activities to be more efficient and profitable.
3. To achieve cost reduction.
4. To exploit the maximum utilization of strategic assets such as monopolistic conditions,
goodwill, patents etc.
5. To eliminate or to have an edge over competitors.
6. To make use of synergies and value additions.
7. To achieve economies of large scale of operations.
8. To have an access to research and technological developments.
9. To focus on core strengths of the company.
10. To revive or rehabilitate a sick unit.
11. To assure constant supply of resources.
12. To utilize tax benefits.
13. To improve corporate performance.

BROAD AREAS OF CORPORATE RESTRUCTURING

The corporations can be restructured in various aspects. The following are the broad areas of
corporate:
1. Financial Restructuring. It is the process of rearranging the financial structure or the capital
base of the company. It may be carried out by reduction of capital, reorganising the equity
and debt base, buy back of shares etc. It may also include the decisions relating to mergers,
acquisitions, strategic alliances etc.
2. Operational Restructuring. It helps in improving the operational efficiency by adopting
product restructuring, market restructuring etc. The product range may be restructured, the
market strategies relating to market segmentation and so on may also be reorganized.
3. Managerial Restructuring. It involves replacement of Chief Executive Officer or managers
who have failed to deliver to the expectations. Managerial restructuring helps in improving
the manpower resources of the firm.
4. Asset Restructuring. It involves making new investments, technological changes, asset
reductions, buy-outs, spin offs, sale and lease back transactions etc.

To be effective, corporate restructuring may require restructuring of one or more of the above
areas of restructuring. In some cases even all forms of restructuring may be needed.

The Restructuring Process

1. Planning Phase

• Set your SMART objectives, calculate the ROI you're aiming for: restructuring your business
only makes sense if your profitability and market position are improved.

• Build a restructure budget: without a sufficient project budget, your restructure will not
succeed.

• Internal communication to gain team’s support & give/get ongoing feedback: this is how you
build the right culture for your new organisational structure. Get this right and the rest of
your job becomes exponentially easier.

• Choose your Project team: make sure it is both cross-functional and includes employees
from all of your locations. Your project team should include all key people who are needed
to make the project successful.

• Nominate only one fully dedicated project manager/coordinator: “shared” responsibility

does not work in restructuring.

• Nominate one “sponsor” from the senior management team who will support the process:
without support from the top, the restructure will be more difficult than necessary. Buy-in
from all levels within your business is essentials, but without leadership buy-in, you will be
doomed to failure.

• Project management tools and procedures in place: project management tools should be
used, especially in complex projects. You're going to need a toolkit that will set your project
up for success.

2. Implementation Test Phase

• Test phase: Small-scale tests are needed to avoid a risk of big and costly mistakes affecting
the whole organisation.

3. Measurement & Analysis of Test Phase

• Measurement of results against SMART objectives: tracking your performance against your
objectives enables you to see how close you are to each of them throughout each iteration
of the project.

• Corrections of initial plans, if necessary: starting in smaller test groups, and testing your
process for gaps / issues / errors enables you to pivot and improve so that you get it right
before you take the process to your entire organisation.

• This is the most important part of restructuring process in its implementation phase. If a test
is not successful, the whole restructuring is in danger.

4. Full Rollout

• Measurement of results against SMART objectives: how close to your restructure objectives
 did your full roll-out get? Full reporting means that you have a record of your process and
your success, so that next time you embark on a project of any kind, you have a roadmap for
success.

• Corrections to implementation: this is your opportunity to recommend any final tweaks to

your process.

5. Typical Mistakes in Planning and Implementation of Restructuring Process

• Insufficient internal communication destabilizes the organisation too much during the
process.

• Limited co-ownership of the project at all organizational levels negatively affects the
implementation.

• Your restructure is not built upon the foundation of your strategy.

Types of Corporate Restructuring

1. Financial Restructuring: The Financial Restructuring may take place due to a drastic fall in the
sales because of the adverse economic conditions. Here, the firm may change the equity
pattern, cross-holding pattern, debt-servicing schedule and the equity holdings. All this is
done to sustain the profitability of the firm and sustain in the market. Generally, the
financial or legal advisors are hired to assist the firms in the negotiations.
2. Organizational Restructuring: The Organizational Restructuring means changing the
structure of an organization, such as reducing the hierarchical levels, downsizing the
employees, redesigning the job positions and changing the reporting relationships. This is
done to cut the cost and pay off the outstanding debt to continue with the business
operations in some manner.

Benefits Of Restructuring
1. Boosts Communication: While reorganizing business activities or organizational elements,
corporate leaders may probably boost interaction between corporate branch locations or
divisions. Also, it affects the working process of departments toward organizational goals
and their collaboration with each other.

2. Sustains Or Refines Company Funds: This helps enterprises maximize revenue streams, debt
reduction, or sustenance of operations throughout financial downturns.

3. Equalizes Firms with Rivals: It permits the organizations to facilitate their functional
structure and funds or adjust to industry changes. Therefore, corporations can match market
rivals and maintain a robust business image.

4. Enhances Employee Productiveness: The reorganization of divisions or a complete firm lets

the organizational leaders redesign commercial affairs and roles in a manner that benefits
employees. To clarify, this comprises the workers’ movement into distinctive teams or parts
and executing systems to boost functionalities.

TECHNIQUES OF CORPORATE RESTRUCTURING

There are many techniques or strategies that are used for corporate restructuring such as mergers,
takeovers, demergers, divestment, joint venture, divestment., franchising, slump sale, buy-out, spin
off etc. Depending upon the objective of restructuring, the companies may adopt different
techniques at different times.
The various techniques of corporate restructuring may be classified as expansion or growth
techniques and contraction or divestment techniques as shown below:

Some of the important techniques have been summed up in this chapter along with financial
restructuring and buy-back of shares. However, mergers and takeovers as well as management of
sick units have been discussed in detail in subsequent chapters of this back.

1. Mergers. 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 to merge two or more existing companies. The term merger is also used as
amalgamation. The merger may thus take any of the two forms merger through absorption or
merger through consolidation.

2. Acquisition and Takeover. Acquisition does not involve combination of companies. It is simply an
act of acquiring control over management of other companies. When a company takes over the
control of another company through mutual agreement it is called friendly takeover. On the other
hand, if the control is taken over through unwilling acquisition it is called known as hostile takeover

3. Strategic Alliance. An alliance/agreement between two or more companies to collaborate with

each other without merging their independent identities is called strategic alliance. The purpose of
nucl an alliance is to achieve certain objectives such as use of advanced technology, improved
competitive abilities etc.

4. Joint Venture. A joint venture is a partnership of finance. It is an organisation formed to

undertake financial activity together by two or more companies. The firms joining together to form
a joint venture contribute towards capital and management of the joint organisation and share
revenue, expenses, profits and losses. Joint venture may be in the form of project based joint
venture or function based joint venture.

5. Franchising. Under the scheme of franchising, one party (franchiser) grants the right to use brand
name or trade marks to another party called franchisee to produce or market goods or services for
a lump sum payment or a share of franchisee's profit or revenue or both. The examples can be that
of McDonalds, Pizza Huts etc.

6. Licensing. It is a technique under which the manufacturer enters into an agreement with a licence
granting him the right to use the manufacturing process, a patent design or a trade mark or the
technical facility in return for an agrred fee or royalty.

7. Holding and Subsidiaries. Another way of expanding business operation is the establishment of
wholly owned subsidiaries. There are countless examples of such subsidiaries of MNCs in India, such
as coca-cola, Nestle India, Hindustan Unilever, Procter and Gamble of India etc.

8. Disinvestment. It is the process of liquidating an asset by government in the public sector

undertakings or by any other organisation by way of selling certain share in the equity of the firm.

9. Buy-out. A buy-out is a divestment technique to sell off the business of a firm. When a company
is not being run successfully by its present owners, it may be purchased by its management, ie,
directors or managers. The management may consist of one or more directors, employees or even
associates from outside. In a management buy-out, the management acquires substantial
controlling interest from its existing owners.

10. Leveraged Buy-out. A leveraged buy-out may be defined as the acquisition or buy-out of
ownership financed largely of debt. In a management buy-out, when the potential management
does not have sufficient resources to pay the acquisition price, it may approach outside sources
such as banks, financial institutions, venture funds and others to finance the buy-out. The outsiders
may provide debt to the tune of 50% or more of the acquisition price depending upon the cash
generating capacity of the business in future to repay the debt. Such a buy-out transaction which is
primarily financed by debt is termed as leveraged buy-out (LBO). There may also be some equity
participation by the outsiders but mainly the transaction is financed through debt. A leveraged buy-
out involves considerable financial risk because of high debt level in its financing. Thus, a leveraged
buy-out will not be suitable where the firm to be acquired has a high degree of business risk. An
important step involved in the LBO is the determination of the maximum degree of financial
leverage. After the successful implementation of leveraged buy-out, the acquiring group may again
take the company to public, called the process of Reverse LBO. Despite of the effectiveness of LBO
as an effective mode of corporate restructuring, it has been criticised on many accounts. If the
acquiring management team is not able to repay the debt as scheduled, the firm should be exposed
to the risk of liquidation.

11. Sell-off. A sell off is a divestment technique where in a part of the organisation (such as a
division or a product line) may be sold to a third party as a process of strategic planning. A firm may
take such a decision to concentrate on its core business activities by selling non-core business.

A sell off may be desirable:

(a) To improve the liquidity position.

(b) To reduce business risk by selling high risk activities.

(c) To concentrate on core business areas.

(d) To increase efficiency and profitability.

(e) To protect the firm from hostile takeovers etc.

12. Debt-Equity Swaps. When a firm wants to increase or decrease its debt ratio, it may replace
equity with debt or vice-versa. In many cases firms have resorted to debt for equity swaps to
prevent hostile takeovers. However, the firm should study the effects of higher leverage before
going into such a swap. Similarly, an overvalued firm can negotiate with holders of debt instruments
to take equity stake in the firm in lieu of some of its debt or it may issue new equity to pay off the
existing debt.

What Is Spin-Off?
A spin-off is a sort of divestment in which a portion of a company is separated and formed as a
separate company by issuing new shares. Spin-out or starburst are two terms for this type of
business divestment. To compensate for the loss of ownership in the initial stocks, the stakes are
given as a dividend to existing shareholders in proportion to their holdings. The company's license
will remain unchanged in this fashion, with the same investors owning it in the same ratio.

Split-Off
In a split-off, shareholders in the parent company are offered shares in a subsidiary, but the catch is
that they have to choose between holding shares of the subsidiary or the parent company. A
shareholder has two choices: (a) continue holding shares in the parent company or (b) exchange
some or all of the shares held in the parent company for shares in the subsidiary. Because
shareholders in the parent company can choose whether or not to participate in the split-off, the
distribution of the subsidiary shares is not pro rata as it is in the case of a spin-off.
A split-off is generally accomplished after shares of the subsidiary have earlier been sold in an initial
public offering (IPO) through a carve-out. Since the subsidiary now has a certain market value, it can
be used to determine the split-off exchange ratio.

To induce parent company shareholders to exchange their shares, an investor will usually receive
shares in the subsidiary that are worth a little more than the parent company shares being
exchanged. For example, for $1.00 of a parent company share, the shareholder may receive $1.10
of a subsidiary share. The benefit of a split-off to the parent company is that it is akin to a stock
buyback, except that stock in the subsidiary, rather than cash, is being used for the buyback. This
offsets part of the share dilution that typically arises in a spin-off.

In November 2009, Bristol-Myers Squibb announced the split-off of its holdings in Mead Johnson in
order to deliver additional value to its shareholders in a tax-advantaged manner. For each $1.00 of
Bristol-Myers Squibb's common stock accepted in the exchange offer, the tendering shareholder
would receive $1.11 of Mead Johnson stock, subject to an upper limit on the exchange ratio of
0.6027 Mead Johnson shares per share of Bristol-Myers Squibb. Bristol-Myers owned 170 million
Mead Johnson shares and accepted just over 269 million of its shares in exchange, so the exchange
ratio was 0.6313 (i.e., one share of Bristol-Myers Squibb was exchanged for 0.6313 shares of Mead
Johnson).

Split-up
In a split-up, the parent company will split into two or more new entities. These newly formed
entities operate independently. In this also, shareholders will get an offer to exchange to the parent
company and they are taxed based on liquidation.

The main reason to split-up is to explore or operate in a new profitable business. This also avoids
monopolistic practices. The main advantage of this method is, it offers diversification of business.
Profits generated after a split-up attract shareholders (either new or existing) and increase in their
share price.
The major differences between a split up and a split off are as follows

Split ups Split offs

Parent company split ups to form two or New entity is formed from the parent company.
more new companies.

Parent company is dissolved. Parent company is not shut.

Share of the parent company is traded to Shareholders can opt to hold the shares in the
new companies. parent company or trade their shares to a new
entity.

Main aim is to create various business lines. Transactions of parent company and new entity
are differentiated.

Taxed only on liquidation of the company. Parent company can’t enjoy the tax benefits.

No benefits to shareholders. Premium is offered to the shareholders, after

they traded their shares to a new entity.

Difference Between Spin Off and Split Off

Spin-Off Split-Off
A spin-off is a corporate action in which a A split-off is a corporate action in which a company
company creates a new, separate entity by separates a subsidiary or division by exchanging
distributing shares of an existing subsidiary shares of the subsidiary or division for shares of the
or division to its existing shareholders. The parent company, effectively transferring ownership
new entity becomes an independent, of the subsidiary to the existing shareholders of the
standalone company. parent company.
In a spin-off, the parent company retains an In a split-off, the parent company completely
ownership stake in the new entity but may transfers ownership of the subsidiary or division to
gradually reduce its stake over time through the existing shareholders, resulting in the
additional share distributions or sales. subsidiary or division becoming an independent
entity with no ongoing ownership or control by the
parent company.
A spin-off typically involves the creation of a A split-off does not involve the creation of a new
new publicly traded company, and the shares publicly traded company. Instead, the subsidiary or
of the new entity are distributed to the division being split off becomes a separate entity,
shareholders of the parent company on a but its shares are exchanged directly for shares of
pro-rata basis. the parent company.
The purpose of a spin-off is often to unlock The purpose of a split-off is typically to separate a
the value of a subsidiary or division that may subsidiary or division that may have different
be overlooked or undervalued within the operations, financial characteristics, or strategic
parent company, allowing it to operate goals from the parent company, allowing each
independently and pursue its own strategic entity to focus on its specific business.
objectives.
A spin-off can provide the parent company's A split-off enables the existing shareholders of the
shareholders with the opportunity to directly parent company to exchange their shares for
own shares in the new entity, potentially shares of the subsidiary or division being split off,
allowing for increased value realization and providing them with ownership in a different
investment opportunities. entity.
A spin-off often results in two separate A split-off may result in a separate entity, but it
publicly traded companies with independent may not necessarily be a publicly traded company.
boards of directors, management teams, and The new entity can have its own governance
financial reporting. structure, management team, and financial
reporting if it chooses to operate independently.
The shares of the new entity in a spin-off are In a split-off, the exchange ratio is determined
typically distributed to the existing based on negotiations between the parent
shareholders of the parent company based company and the existing shareholders, and it may
on a predetermined ratio or formula. involve additional considerations or adjustments to
ensure a fair exchange.
A spin-off can provide the new entity with A split-off does not provide the new entity with
access to capital markets and the ability to immediate access to capital markets, as it does not
raise funds independently through debt or involve the creation of a new publicly traded
equity offerings. company. However, the new entity may explore
funding options independently.
A spin-off requires regulatory approvals, A split-off may involve certain regulatory
compliance with securities laws, and often considerations and compliance requirements, but
entails filing registration statements with it does not typically require the same level of
regulatory authorities to facilitate the listing regulatory approvals or public offerings.
of the new entity's shares on a stock
exchange.
A spin-off can result in tax implications for A split-off may also have tax implications, and
both the parent company and the shareholders may need to evaluate the tax
shareholders, as the distribution of shares consequences of exchanging their shares in the
may be subject to tax treatment based on parent company for shares of the subsidiary or
applicable laws and regulations. division being split off.
A spin-off may allow the parent company to A split-off may also enable the parent company to
focus on its core business operations and streamline its operations and focus on its core
strategic priorities by divesting non-core business by separating a subsidiary or division that
assets or business segments. does not align with its strategic direction.
A spin-off can result in enhanced A split-off may not necessarily involve the same
transparency and accountability for the new level of transparency and accountability, as the
entity as a standalone company, as it is new entity may not be subject to the same
required to comply with regulatory reporting regulatory reporting and governance requirements
and governance requirements. as a publicly traded company.
In a spin-off, the value of the shares In a split-off, the value of the shares exchanged is
distributed to the existing shareholders of typically determined based on negotiations or
the parent company is determined based on independent appraisals to ensure a fair exchange
market conditions and the valuation of the for both the parent company and the existing
subsidiary or division being spun off. shareholders.
A spin-off can provide shareholders with the A split-off can also offer shareholders the chance to
opportunity to participate in the growth and participate in the future prospects of the new
potential of the new entity as a separate entity, but it may not provide the same level of
investment opportunity. investment opportunities as a publicly traded
company.

What is Divesting?
Divesting is the act of a company selling off an asset. While divesting may refer to the sale of any
asset, it is most commonly used in the context of selling a non-core business unit. Divesting can be
seen as the direct opposite of an acquisition.

Divesting can create an injection of cash into the company, while also serving the company’s overall
corporate strategy. Divestitures are a common advisory mandate in investment banking.
Sometimes a divestiture is also referred to as an exit strategy.

Reasons for Divestiture

There are a lot of reasons why companies go about a divestiture, however in general terms, the
reasons to divest tend to fall under one of the following:
1. Not part of core-business
This is the most commonly cited reason among managers for divesting of assets, at least in part
because it’s the best reason to divest: Essentially, the parent company is moving in a different
direction and the asset is no longer a fit with its corporate strategy. (i.e. it’s a non-core asset).

Typically, these assets are located in markets which have become less of a strategic focus for the
company. A recent example is provided by GE’s decision to divest its share of Baker Hughes, the oil
field services company.

2. Generation of additional funds

The need to generate additional funds - and avoid the need to sell shareholder equity or issue debt -
is a common reason for divesting. There is an obvious overlap between this reason and reason 1 if
the additional funds are required to make an acquisition.

Currently, companies such as Aryzta in food, Tata Power in energy and Takeda in pharmaceuticals
are looking to divest of non-core assets, readily admitting in each case that the motive behind the
divestments is to reduce their debt.

3. Lack of internal talent for business

This is one of the less obvious reasons for divesting a business, but the global talent shortage hints
that it may become more popular in the coming years. This is more common in service lines, where
a lack of human capital may impinge on the company’s ability to continue providing the service,
forcing them to divest the business unit in question.

The example of publicly-listed British funeral services firm, Dignity PLC, which has been able to
acquire hundreds of funeral parlours and crematoriums in the UK, often family-run businesses, is a
case in point.

4. Opportunistic approach for asset from third party

Another common reason for divesting an asset is because an attractive offer is received from a third
party - usually another company from the same industry, or a private equity company. The fact that
the asset wasn’t being marketed for sale should put the selling company in a better position during
negotiations and typically leads to a higher selling multiple. Iconic assets, including brands and real
estate, often attract vanity purchases. That is to say, the buyer is looking to acquire for ego-related
reasons rather than strategic ones.

Merger
Definition: Merger is a process of combining two companies or entities to form a third separate
company by signing an agreement with a vision of going forward to achieve a respectable position
in the market. To achieve the targets that they feel they can achieve together more appropriately
by combining their strengths rather than working individually.
Example of Merger
Let’s say; Company A sells vehicles, and company B sells parts of vehicles, both the companies are
interdependent on each other for their sale. Thus, both the companies can mutually decide to
merge their companies following the clauses mentioned in Companies Act, 2013 and can create a
separate company naming AB Limited. Or, Company A can absorb the company B to manufacture
the vehicles so that the cost of purchasing parts from the outside company may reduce and the
profit margin will increase.

Types of Merger

1. Horizontal Merger: Horizontal Merger implies combining two entities of the same industry which
are on the same stage. This type of mergers is done to raise the market share and eliminate
completion from the market. One of the examples of a horizontal merger is Flipkart has acquired
Myntra, here both are working in an online retail space and selling goods, then also Flipkart has
acquired Myntra for increasing their market share.
For Example: Company A and Company B produce cell phones. Now, if Company A acquires
Company B, company A will be able to serve the customer base of Company B also under its brand
name. It will help in penetrating the market and, as a result, will act as the market leader. Presently,
such acquisitions are highly visible in the information technology sector. Tech giants keep acquiring
technology startups and will leverage their customer base. It allows them to cover the uncovered
area and make their presence feel across the globe.

2. Vertical Merger: Vertical Merger is consolidating two companies of different lines of production
and the reason behind this type of merger is to raise the synergies and increase the quality control
in a business. Vertical Merger is divided into two parts:

Forward Merger/ Integration: When an entity gets merged with the upward entity of the supply
chain, which is closer to the customer, this type of merger is known as a forward merger.
Example: Let us assume that, Amazon acquires a logistic company (product delivering company), it
will be a forward integration as a logistic company, delivers the products to the customers.
Backward Merger/ Integration: When Entity gets merged with the downward entity or the entity
which are below in the supply chain, such a merger is known as a backward merger.
Example: Let us assume that, Amazon merges with the companies selling goods on its portal such as
Samsung, it will be considered as a backward integration as Samsung is a seller who sells his
products in the website.
Target Corp. is the best example of vertical acquisition. The company is one of the largest retail
chain holders in the United States. It has its own manufacturing unit, distribution channels,
wholesale and retail stores, which cover a large customer base and remove any intermediary.

3. Conglomerate Merger: In this type of merger two companies from totally different industries are
merged, such as an automobile company merged with a clothing company. The reason behind such
kind of merger may be diversification of activities when the companies find themselves drenched in
their existing business then they divert themselves towards a completely different business to get
advantages from the new business. However, the biggest risk involves in this type of merger is
unknown markets and services as the company has shifted entirely from one market to another.

The best example of a conglomerate is the merger between PayPal and eBay. Around 2002, PayPal
was not able to maintain its market reputation. The e-commerce giant acquired PayPal just by
paying around a billion dollars at that time. However, presently eBay has a market value of a
hundred billion dollars. eBay had spanned off PayPal after its acquisition. As a result, PayPal has
revolutionized the payment system and challenged the traditional payment method. These
acquisitions are considered a benchmark step for bringing modern change in Silicon Valley.

4. Congeneric Merger: This type of merger involves the extension of activities in a similar industry at
a development stage., i.e., companies may be of the similar industry, but products of both the
companies are different. This type of merger is basically done for taking the market advantages of
technological extensions in the same products.

Citi Group is the global banking corporation. Its core business focuses on providing banking services
to customers. The major crunch is large corporations whose presence is there across the globe.
Such large corporations have executives frequently traveling throughout the world for business
meetings. For such executives, there is a huge need to take travel insurance. Citi Group identified
this requirement of travel insurance and acquired Travelers Insurance Co. With the help of this, Citi
Group is now able to serve large corporate clients, even travel insurance in addition to banking
services.

5. Reverse Merger: Reverse Merger implies acquiring the public company by a large private
company to get an access of the IPO Markets or maybe the brand value of the small public company
is very good because of which large private company acquires it.

Benefits of Merger

There are various tenable reasons behind the merger of the companies; some of them are as
follows:

1. Synergy: Synergy implies creating something extra by combining two entities by way of reducing
competition and cost, and increasing scope and scale. For Example, Company A alone has a value of
50 crores, and company B has a separate value of 50 crores, but together after a merger, they have
a value of 150 crores (50 crores extra). These additional 50 crores are nothing but a synergy.
2. Integral Resources: Companies having integral resources, i.e., interdependent resources generally
become much more profitable after the merger. As some companies have innovative ideas but do
not have good marketing tactics or reach to the market. Thus they can be merged with the company
having good marketing reach and together can make a separate company with all required
elements for creating innovative products.

3. Tax Benefits: Sometimes, companies face accumulated losses for a long period of time because of
which they cannot extract tax advantages. However, if the company merges with a profit-making
company, their losses can be set off with the profits and tax benefits can be availed.

4. Discharge of surplus funds: Company having sufficient funds after distributing dividends to their
shareholders in such case rather than making investments in non-profitable concerns a merger with
another firm which seems profitable in future is a good option for utilizing surplus funds.

5. Increase in administrative efficiencies: Mergers sometimes results in increased administrative

efficiency with an increased workforce with more adequate and improved efficiencies. It also raises
the harmony amidst managers and the shareholders of the companies that are merged.

Acquisition
Acquisition is growth strategy in which the company purchases or takes over another business. In
this manner the company can enter new markets or new products or get access to a new
distribution channel. The company which acquires new business needs to manage the acquisition
carefully otherwise it could financially be suffered. It can make phase wise payments so that these
are matched to the funds generated by the organisation. The logic behind the acquisition is that
companies are al- ways available for being acquired. However, when the choice facing the company
is limited then it can expedite the acquisition process. In an acquisition the firm buys a controlling
stake in the target company. This is done with the intention of making it a subsidiary business or
merging with one of the existing businesses of the acquiring company. For most companies
acquisition is a one-time activity which is done with a specific objective in mind. The process of
acquisition is a case of dominance of one company over the other. Here a bigger company will take
over the shares and assets of the smaller company and either run it under the bigger company's
name or might run it under a combined name. The acquisition is an act of dominance. In this the
target company is taken over by the acquiring company. After this it is run either in the acquiring
company's name or by a new name. For example, when Satyam was taken over by Mahindra and
Mahindra, the erstwhile Satyam name got merged in Tech Mahindra.

Types of Acquisition
#1 – Friendly Takeovers:
In this type of takeover the acquiring company notifies the target company's board of directors of
their bid. The board decides if accepting the offer is in the best interests of the shareholders of the
company or not and accordingly makes the decision. In private companies, the board of directors is
usually the majority shareholders and hence private acquisitions are friendly in nature. In case the
shareholders decide to sell the company, then the board of directors already has instructions to
accept the friendly bid request.

#2 – Hostile Takeovers:
In this the acquiring company tries to acquire the target company in the face of severe opposition
from the target company. In this, the acquiring company actively continues with its acquisition
efforts even after the board of directors has rejected its bid offer or the acquirer company makes
the bid without informing the board of di- rectors of the target company. It is a kind of takeover
strategy in which a lot of opposition has to face by the acquiring organisation from the tar- get firm.
Under the hostile takeover, despite the acquisition bid rejected by the board of directors of the
target company, the acquisition firm continues to perform acquiring activities and without giving
any information to the board of directors, acquisition is conducted. Hostile takeover is ethical in
nature. This is because, in most of the cases, the victims of the hostile takeover are the weak firms
and a lot of benefits are obtained by its customers and shareholders from such takeovers. There
may be some managers and employees who might lose their jobs While some may get additional
benefits during the activities of hostile takeover. Thus can be some arguments regarding the
ethicality of hostile takeovers.

#3 – Reverse Takeovers:
Reverse Takeovers or RTOS is a type of merger activity in which the acquiring company tries to get
itself publicly traded without going for an initial public offering. In this the private company first
buys enough shares in a publicly traded company through the open market. It then tries to swap its
shares for the shares of the publicly traded company. It thus becomes publicly traded indirectly.

#4 – Back-Flip Takeovers:
This is a rather uncommon type of takeover in which the acquirer company becomes a subsidiary of
the target company. After the takeover the business is carried out in the name of the ac- quired
company. This is called a back flip takeover because in a conventional takeover the new entity
typically takes the name of the acquiring company. In the case of Back-flip takeover it is the
opposite. The ac- quired company assets are taken over by the acquiring company and the control
of the business is usually in the hands of the acquirer company. This is typically because the
acquiring company is of sounder financial health and the acquired company is a struggling entity.
For example, this was the case in the Satyam takeover by Mahindra and Mahindra.

Benefits of acquisition
The following is a list of acquisition benefits that you may want to consider if you're deciding on
whether to enter into an acquisition contract:

1. Improves a struggling business

The business you work with may be going through an underperforming phase and acquisition may
be a solution. An acquisition may be an important way to help the business thrive, as it has the
opportunity to join forces rather than operating alone. This can help to prevent the business from
failing as you get to share resources with the business to which you're merging.

2. Obtain funds for development

By entering into an acquisition, a business can have access to funds or other valuable assets which
may not be at the disposal of a standalone business. An acquisition can help you acquire these
assets with ease. Since the development of the business is the ultimate goal, joining forces with a
company that has adequate funds can be beneficial for the business and its employees.

3. Gain access to quality staff with adequate skills

An acquisition can help increase the quality and quantity of staff with sound knowledge of the
business demands. After executing an acquisition, the experienced staff typically remain on the
company's payroll so they can integrate. Their business intelligence helps the companies thrive after
the combination.

4. Diversify the business

Through the acquisition, there can be diversification of the products and services the company
offers. You can produce varying products and have them distributed or spread out to different
target customers. An acquisition typically helps a business grow and evolve.

5. Enhance market power

Entering into an acquisition can help you merge market powers and exercise control when you
enter a new market. It boosts your market presence and market share because of the synergy it
comes with. An acquisition may help you reduce competition and maintain market power if you
intend to set up branches or subsidiary companies.

6. Ensure access to more capital

When an acquisition happens, access to capital becomes improved because the company is now
larger. By virtue of the agreement, there is availability and accessibility of higher capital and
funding. Based on the agreement the companies reach while making the acquisition, adequate
capital can extend to both companies.

7. Reduction of training costs

With an acquisition, you can use resources from the other acquisition company to decrease internal
training expenses within the organization for which you work. If the acquired company develops its
resources, it doesn't need to pay the costs of training staff. Depending on the level of development
the resources the company has, you can use them to train others in the organization to improve
their skill set.

8. Increase your company's competitiveness

Due to the rise in technological advancements, an acquisition can address the need to conform to
higher standards. This way, a larger company can retain its competitive stance by uniting with a
smaller business that has the necessary technologies. This can benefit both companies long-term.

9. Reduce production costs

Merging with another company that has the production centers, facilities and storage space, can
reduce your production costs if you're able to use these resources. Building facilities such as these
resources can be expensive but may become necessary as the business grows. Resource sharing
may have a significant impact on the production costs and budget.

10. Allow you to meet the expectations of stakeholders

Stakeholders may have expectations concerning the growth of the company and an efficient way of
meeting these expectations is by entering an acquisition. An acquisition means more investment
returns are likely to happen, which can please the stakeholders. An acquisition is an easier way to
handle pressure from the stakeholders and you may even exceed their expectations.

Motives of merger and acquisition

Below constitutes what we believe to be a quite exhaustive list of the driving forces for mergers and
acquisitions:

- Market expansion
Acquiring a company in a different geographic market can open access to new customers,
industries, markets, and suppliers. A company which has excelled at this strategy is Spanish (and
now, global) bank, Santander, which has acquired domestic banks in over 20 countries to fuel its
growth.

- Increased market share

Acquiring a competitor generally tends to allow a company to gain a larger market share, thus
strengthening their market position. This is common among banks, where consolidation has led to
most countries having a ‘Big 4.’
This was also a facet of the U.S. food retail industry, where a wave of M&A in the 1990s led to the
bigger players holding significantly increased market shares.

- Diversification
M&A enables companies to diversify their product or service offerings, reducing reliance on a single
market or industry. This has traditionally been one of the drivers behind acquisitions among
conglomerates, who have several business lines at once, enabling them to diversify their revenue
flows, thereby reducing their risk. Nestlé is a textbook example of diversifying through M&A.

- Cost Savings
Merging operations can often result in cost savings through economies of scale, streamlined
processes, and reduced duplication (for example, having one HR function instead of two). This is
common to most M&A transactions, and is usually filed under ‘synergy creation’, which is the next
bullet point.
Airline mergers are good places to look for cost savings, as there are huge costs generated at all
parts of their value chains (e.g.., ground staff, baggage handlers, customer service, etc.). The merger
of U.S. Airways and American Airlines saved an estimated $150M in costs per year.

- Synergy creation
Synergy creation can be revenue synergies (i.e., where more of each product or service sells by
virtue of grouping it with another product or service), or cost synergies (like those mentioned in the
‘cost savings’ bullet above).
Most transactions cite at least one of these as their primary motive. The most high profile example
of a deal which achieved both forms of synergies was the merger of Exxon and Mobil back in 1998.

- Talent acquisition
Sometimes, smaller companies are acquired because they’ve got a few highly skilled individuals on
their roster, which have attracted the attention of a rival company. This isn’t a common driver for
M&A but it does exist. Facebook has acquired a series of company with the principal aim of owning
their talent.

- Enhancing competitive advantage

In this context, enhancing competitive advantage means acquiring something so that others cannot
gain access to it. This is usually something not repeatable (i.e., it is patented or one-off in some
other way).
The issue here is that companies don’t admit to it. In fact, they active underplay it, in an attempt to
avoid the gaze of the antitrust office. One to consider here is Amazon’s purchase of Kiva in 2012.
This article outlines how, by not sharing Kiva with anybody else, Amazon enhanced its own
competitive advantage significantly.

- Accelerated growth
When growth is sclerotic in a certain segment of an industry, companies will often look to other
higher growth segments to acquire companies that can speed up sales. A good example here is
provided by the soft drinks industry, which went through a phase of buying energy drinks - which
were growing much faster than traditional soft drinks around a decade ago.
The classic case is Coca-Cola acquiring the now ubiquitous Monster Energy in 2008.

- Vertical integration
Vertical integration is driven by the motive to acquire upstream or downstream operations,
ensuring better control over the supply chain.
example is furniture maker IKEA acquiring Romanian forests in 2015, providing it with the raw
materials to churn out its flatback chairs, tables, and beds.

- Access to new technologies

Mergers and acquisitions enable companies to gain access to innovative technologies or R&D
capabilities that they don’t currently possess. Most technology acquisitions include some element
of this.
A good example of this comes from a somewhat unlikely source, however: Disney’s acquisition of
Pixar in 2006 was driven by many factors, one of which was the desire to gain control of Pixar’s then
revolutionary animation technology.

- Brand strengthening
Acquiring a well-known brand enhances brand value, reputation, and even customer loyalty for the
acquiring party. The French conglomerate, LVMH, has acquired dozens of luxury brands with the
intention of creating an unrivaled portfolio of luxury brands that takes in everything from shoes and
accessories to perfumes and haut couture.
Each extra brand, in theory, gives the LVMH brand a more illustrious reputation.

- Access to licensing or distribution

There are a couple of ways of thinking about M&A for licensing or distribution. The first is acquiring
a company and gaining control of its distribution channels (relationships with vendors, warehousing,
and even retail). This is a subset of ‘market expansion’, the first bullet point on this list.
Another facet of this is licensing: Acquiring a foreign company to acquire its licences to provide a
service or produce something within a country. Here, acquisitions of national telecoms firms are a
good example. Consider Vodafone’s acquisition of Telcim, Turkey’s second largest mobile operator,
in 2005.

- Economies of scale
If ‘diversification’ might also be called ‘economies of scope’, economies of scale are the benefits
that result from building a company to a size, which has market power. That is to say, it creates
value by virtue of being big.
An example is Walgreen’s acquisitions of several other pharmacy chains over the past decade,
giving it enhanced bargaining power with large pharmaceutical suppliers looking for distribution for
their drugs.

What is M&A Value Creation

Value creation may imply different things to different people depending on whether they are
shareholders, owners, or stakeholders. During the early stages of a firm, an owner may strive to
build value for himself by earning returns that exceed his capital expenses and reaching his goal
return on investment. As the organization grows, it must also consider the expectations of other
stakeholders for value generation. Strategically, the firm seeks to match the value expectations of
its consumers, resulting in increased sales of its goods and services.
In new technology-driven companies such as robotics, value creation can be achieved by investing
in development and innovation or merging with existing technology firms. Such approaches help
businesses to provide their clients with cutting-edge solutions, leading to successful value creation.
Clients in other areas also expect consistent quality services, innovative processes, and an enhanced
corporate reputation. Market presence, revenue growth, productivity, and margin stability can also
determine the firm’s value. In terms of operations, the firm must also meet the expectations of
stakeholders, employees, and the general population. By creating value, the company makes better
use of its financial and human capital, resulting in profitable and sustainable growth.

Primary Reasons for failure in value creation through M&A

Indian companies would have been in a better state if they had not taken the path of Merger and
Acquisition for organic-growth. Around 75% of M&A transactions made by the local firms have
failed to create substantial value from the deals; moreover, 59% of the acquirers have indeed
destroyed value within one year of closing the deal.

As per the legal experts, the Indian companies do not accentuate on integration issues before
finalizing an M&A deal. However, the acquirers around the world persistently insist on an
integration plan and a detailed synergy assessment prior to sealing the deal. Besides, firms lose
interest in the acquired assets and do not refurbish them post-transaction, which affects the value
of the acquirer.

Generally, it takes 12 months after M&A deal completion to determine the success of the
transaction and check if it will add any value for the buyer’s shareholders or not. The most common
reasons that lead to the failure in value creation through mergers and acquisitions are cultural
disparity and post-integration while there are other factors as well. Let us look at the other reasons:

- Inadequate Involvement of the Owner- Some business leaders may take an active part in the
process of Merger and Acquisition, but plenty of the owners count on experts to handle
most of the work. During the negotiations of M&A transactions, many professionals oversee
the major issues. It creates problems for the business owners to smoothly function as they
do not get an insight into the existing circumstances and expectations post-transaction for
being out of the picture.
- Integration Impediments- Merger and Acquisition is far easier on papers than merging the
operation & culture in actual. Things may get topsy-turvy if there is no concrete plan for the
integration. Also, a company faces integration obstacles due to miscommunication amongst
the middle to higher management. An uncertainty Merger or Acquisition disrupts the
company’s productivity and efficiency. Therefore, such integration must be evaluated
beforehand and handled diligently.
- Inaccurate Data and Valuation Errors- Overly strategical evaluation and lofty projections are
common reasons for the deal’s demise. Granted, the parties do everything possible to do an
approaching deal. Regrettably, this often shows that the financial matters are certainly
calculated and analysed rather “innovative” to make them as attractive as possible.
Although it is evident that the parties seek to anticipate the numbers assuming the best-case
scenario, however, the reality is far below than what was presented prior to the deal.
- Resource Limitation- A newly formed entity requires plenty of resources, both financial and
human, to overcome the challenges of integrating two different cultures and companies
after M&A. The company ought to update policies, invest in creating extra real estate space,
which requires a bit of time and money. Thence, the company must consider and plan
beforehand; however, that is not always the case.
- Unfavourable Economic Factors- Even the best business plans can go wrong if there is a
sudden change in the economy, which affects stock prices and interest rates. A negative
economic climate will certainly hinder the success of a Merger and Acquisitions, regardless
of how well they were expected to perform.
- Lack of Strategy and Planning- Mostly, the issues mentioned above are responsible for an
M&A deal’s failure, but that can be avoided with proper planning, creation and execution of
a coherent strategy. The central focus is on getting the M&A deal closed, but not enough
attention is paid on the aftermath. Such lack of foresight is the reason that even the smallest
issues get in the way of the deal’s true potential.

Efficient ways for Successful Value Creation through Mergers and Acquisitions
Around 34% of acquirers’ claim that value creation is a priority on the day of closing the deal,
however, 66% of dealmakers said that value creation must be a priority right from the start. Some
acquirers only emphasize upon integrating the hard tangible assets such as accounting, financial,
and operations systems, during M&A to achieve the desired value. Besides, they neglect the soft
and equally important intangible assets like people and culture. The root cause of failure in value
creation through Mergers and Acquisitions is the acquirers’ inability to create synergy, selecting
inappropriate target companies, paying too high a premium, and ineffective integration.

Things to consider for successfully creating value through M&A:

 - With a wise selection of targets and effective implementation of acquisitions, one can
achieve synergy and create value. The difference in the sizes of an acquiring company and
the target company affects value creation. In case the target company is much smaller than
the acquiring company, then it shall not affect value creation. On the other hand, if the
target company has same capabilities as an acquiring company, an opportunity for synergy
creation exists. If the difference narrows and value creation increases, integration often
becomes a problem. It further leads to value loss, even if the companies involved are of
similar size.
- The acquirers need to stay true to the strategic intent. Companies must approach Merger
and Acquisition deals as part of a clear strategic vision and align it to the long-term
objectives for the business. 86% of acquirers said that their latest acquisitions had created a
significant value as it was a part of a broader portfolio review than merely an opportunity.
Thus, companies must bring a more strategic lens to M&A planning and understand where
the business requires strengthening.
- Companies must have a clear blueprint containing all the elements of the value creation
plan. Acquirers should ensure to conduct a thorough due diligence across all areas of the
business for a successful value creation through Mergers and Acquisitions. Consider some
factors like how each element of the value creation process supports your business model,
operating model, technology plans and synergy delivery. Reportedly, 79% of acquirers did
not have an integration strategy in place when signing an M&A deal, while 63% did not have
a technology plan.
- Lastly, prioritize and fix cultural differences at the start of a deal. Human capital and talent
management majorly influence how companies can deliver value. 82% of companies said a
large value was destroyed in their latest acquisition and lost more than 10% of employees
after the transaction took place. Businesses should invest more time and resources in the
process of M&A transactions to succeed. Over two-thirds of the companies said that their
latest M&A deal subsequently created a significant value as they had an integration strategy
in place while signing. The acquirer must have an ability to bring different cultures together,
which is a key factor in determine the success and failure of the deal.

A successful M&A process utilises these best practices

- Thorough evaluation and due diligence of the target companies
- Strategic interest of the potential synergies
- Resource and cultural management;
- Solid communication strategy which helps to facilitate a change in management and raise
value creation.

Difference Between Acquisition and Merger

 Parameter Merger Acquisition

To create a new business

entity, two or more One business takes over all the operations of
Procedure
businesses merge with one the other.
another.

Most of the time, the acquired firm uses the

Name of The merged entity has a parent corporation's name. However, in rare
Company different name. circumstances, the parent firm may let the
former keep its original name.

In a merger, the parties are

Company The target firm is smaller and less financially
of comparable size and
Size stable than the purchasing corporation.
financial position

There is no gap in power

Share The acquiring business completely controls the
between the two firms
Power acquired business.
involved.

The merged company

Shares New shares are not issued.
issues new shares.

Financing of Merger and Settlement

A merger can be financed through various modes of payment, viz, cash, exchange of shares, debt or
a combination of cash, shares and debt. Deferred payment plans, leveraged buy-outs and tender
offers are also being used as financial techniques in financing of mergers in the recent times. The
choice of the means of financing primarily depends upon the financial position and liquidity of the
acquiring firm, its impact on capital structure and EPS, availability of debt and market conditions.

a. Cash Offer. After the value of the firm to be acquired has been determined, the most
straight forward method of making the payment could be by way of offer for cash
payment. The major advantage of cash offer is that it will not cause any dilution in the
ownership as well as earnings per share of the company. However, the shareholders
of the acquired company will be liable to pay tax on any gains made by them. Another
important consideration could be the adverse effect on liquidity position of the
company. Thus, only a company having very sound liquidity position may offer cash
for financing a merger.

b. Equity Share Financing or Exchange of Shares. It is one of the most commonly used
methods of financing mergers. Under this method shareholders of the acquired
company are given shares of the acquiring company. It results into sharing of benefits
and earnings of merger between the shareholders of the acquired companies and the
acquiring company. The determination of a rational exchange ratio is the most
important factor in this form of financing a merger. The actual net benefits to the
shareholders of the two companies depend upon the exchange ratio and the price-
earning ratio of the companies. Usually, it is an ideal method of financing a merger in
 case the price-earning ratio of the acquiring company is comparatively high as
compared to that of the acquired company. We have already explained the impact of
equity financing of a merger on earnings per share and value of the firm in illustrations
2 and 3. Further, when the shareholders of the acquired company receive shares in
exchange in the acquiring company, they are not liable to any immediate tax liability.

c. Debt and Preference Share Financing. A company may also finance a merger through
issue of fixed interest-bearing convertible debentures and convertible preference
shares bearing a fixed rate of dividend. The shareholders of the acquired company
sometimes prefer such a mode of payment because of security of income along with
an option of conversion into equity within a stated period. The acquiring company is
also benefited on account of lesser or no dilution of earnings per share as well as
voting/ controlling power of its existing shareholders.

d. Deferred Payment or Earn-Out Plan. Deferred payment also known as earn-out plan is
a method of making payment to the target firm which is being acquired in such a
manner that only a part of the payment is made initially either in cash or securities. In
addition to the initial payment, the acquiring company undertakes to make additional
payment in future years if it is able of increase the earnings after the merger or
acquisition. It is known as earn-out plan because the future payments are linked with
the firm's future earnings. This method enables the acquiring company to negotiate
successfully with the target company and also helps in increasing the earning per share
because of lesser number of shares being issued in the initial years. However, to make
it successful, the acquiring company should be prepared to co-operate towards the
growth and success of the target firm.

e. Leveraged Buy-Out. A merger of a company which is substantially financed through

debt is known as leveraged buy-out. Debt, usually, forms more than 70 percent of the
purchase price. The shares of such a firm are concentrated in the hands of a few
investors and are not generally, traded in the stock, exchange. It is known as leveraged
buy out because of the leverage provided by debt source of financing over equity. A
leveraged buy-out is also called Management Buy-Out (MBO). However, a leveraged
buy-out may be possible only in case of a financially sound acquiring company which
is viewed by the lenders as risk free.

f. Tender Offer. Under this method, the purchaser, who is interested in acquisition of
some company, approaches the shareholders of the target firm directly and offers
them a price (which in usually more than the market price) to encourage them sell
their shares to him. It is a method that results into hostile or forced take-over. The
management of the target firm may also tender a counter offer at still a higher price
to avoid the take over. It may also educate the shareholders by informing them that
the acquisition offer is not in the interest of the shareholders in the long-run.

Stock Vs. Cash Payments

The method of payment selected by an acquirer often provides some valuable insights regarding
the acquirer’s perception about the ability to realize synergies from the upcoming deal or about the
value of its own equity. For example, if an acquirer believes that its own equity is overvalued, it
would likely prefer an all-stock payment. If the acquirer strongly believes that it will be able to
realize significant synergy potential from the deal, it would prefer an all-cash payment, so as to put
itself in the best position to reap all future benefits.

1. Size of the deal

The bigger the deal, the higher the possibility that an acquirer will employ more stocks than cash in
their payment. This is to protect their cash flow, which a large cash outlay all at once might
threaten. Using stocks for part of the payment may also mean that the acquirer does not have to
increase its debt in order to finalize the deal.

2. Ownership considerations
The key disadvantage of using equity as a payment method is the dilution of ownership. If an
acquirer does not want to affect the ownership structure significantly, offering will likely consist
mostly of cash, as cash payments do not affect the equity ownership stake.

3. Corporate governance
The type of payment may also be influenced by corporate governance considerations. An acquirer
who is not willing to significantly change its corporate governance would prefer a larger portion of
cash rather than stock.

4. Free cash flows

Essentially, free cash flows indicate the availability of cash within a company. Thus, acquirers who
are without substantial cash flows will likely put more weight on the equity part.

5. Tax considerations
The cash payment in an M&A transaction increases the total acquisition costs for an acquirer, due
to the immediate tax payments that must be paid by the target company. The taxes due can add to
the acquirer’s existing tax liabilities.

TAKEOVER DEFENSIVE TACTICS

Normally acquisitions are made friendly, however when the process of acquisition is unfriendly (i.e.,
hostile) such acquisition is referred to as ‘takeover’). Hostile takeover arises when the Board of
Directors of the acquiring company decide to approach the shareholders of the target company
directly through a Public Announcement (Tender Offer) to buy their shares consequent to the
rejection of the offer made to the Board of Directors of the target company.

Take Over Strategies

Other than Tender Offer the acquiring company can also use the following techniques:
- Street Sweep: This refers to the technique where the acquiring company accumulates larger
number of shares in a target before making an open offer. The advantage is that the target
company is left with no choice but to agree to the proposal of acquirer for takeover.
- Bear Hug: When the acquirer threatens the target company to make an open offer, the
board of target company agrees to a settlement with the acquirer for change of control.
- Strategic Alliance: This involves disarming the acquirer by offering a partnership rather than
a buyout. The acquirer should assert control from within and takeover the target company.
- Brand Power: This refers to entering into an alliance with powerful brands to displace the
target’s brands and as a result, buyout the weakened company.

A Study of Stress Management in the Current Changing Economic Situation

Defensive Tactics

A target company can adopt a number of tactics to defend itself from hostile takeover through a
tender offer.
- Divestiture - In a divestiture the target company divests or spins off some of its businesses in
the form of an independent, subsidiary company. Thus, reducing the attractiveness of the
existing business to the acquirer.
- Crown jewels - When a target company uses the tactic of divestiture it is said to sell the
crown jewels. In some countries such as the UK, such tactic is not allowed once the deal
 becomes known and is unavoidable.
- Poison pill - Sometimes an acquiring company itself becomes a target when it is bidding for
another company. The tactics used by the acquiring company to make itself unattractive to a
potential bidder is called poison pills. For instance, the acquiring company may issue
substantial amount of convertible debentures to its existing shareholders to be converted at
a future date when it faces a takeover threat. The task of the bidder would become difficult
since the number of shares to having voting control of the company increases substantially.
- Poison Put - In this case the target company issue bonds that encourage holder to cash in at
higher prices. The resultant cash drainage would make the target unattractive.
- Greenmail - Greenmail refers to an incentive offered by management of the target company
to the potential bidder for not pursuing the takeover. The management of the target
company may offer the acquirer for its shares a price higher than the market price.
- White knight - In this a target company offers to be acquired by a friendly company to
escape from a hostile takeover. The possible motive for the management of the target
company to do so is not to lose the management of the company. The hostile acquirer may
change the management.
- White squire - This strategy is essentially the same as white knight and involves sell out of
shares to a company that is not interested in the takeover. As a consequence, the
management of the target company retains its control over the company.
- Golden parachutes - When a company offers hefty compensations to its managers if they get
ousted due to takeover, the company is said to offer golden parachutes. This reduces
acquirer’s interest for takeover.
- Pac-man defence - This strategy aims at the target company making a counter bid for the
acquirer company. This would force the acquirer to defend itself and consequently may call
off its proposal for takeover.

Disinvestment – Meaning

- Disinvestment is defined as the action of a government aimed at selling or liquidating its

shareholding in a public sector enterprise in order to get the government out of the business
of production and increase its presence and performance in the provision of public goods
and basic public services such as infrastructure, education, health, etc.
- Disinvestment refers to the selling of the government’s stake in public sector undertakings
(PSUs) and other assets.
- It is a process by which the government sells a part or whole of its shareholding in a public
sector enterprise to private entities or the public.
- The objective of disinvestment is to reduce the financial burden on the government,
improve the management and performance of the public sector enterprise, and promote the
growth of the private sector.
- Disinvestment in India started in 1991 as part of economic liberalization and has since
become an important policy tool for the government.
- Funds from disinvestment would also help in reducing public debt and bring down the debt-
to-GDP ratio while competitive public undertakings would be enabled to function effectively.

Objectives
The main objectives of disinvestment in India are:
- Reduce the financial burden of the sick, loss-making PSU’s on the Government
- Improve public finances
- Introduce competition and market discipline
- Fund growth, social sector welfare
- Encourage a wider share of ownership
- Depoliticize non-essential services
- Upgrading the technology used by public enterprises to become competitive
 - Rationalizing and retraining the workforce
- Building competence and strength in R&D
- Initiating the diversification and expansion programmes

Disinvestment in India
Disinvestment in India is a policy of the Government of India, wherein the Government liquidates its
assets in the Public sector Enterprises partially or fully. The decision to disinvest is mainly to reduce
the fiscal burden and bridge the revenue shortfall of the government. The key engine in achieving
growth in India during post-independence was played by Public Sector Enterprises (PSE). Among
other responsibilities of PSE's post-independence, the social and developmental obligations of the
nation were most important, which resulted in these units escaping competitive race. Later on the
activities of the PSU's were divergent, concentrating towards more non-core areas like hotels and
consumer goods among others. Further, the public enterprises were used as tools for political and
bureaucratic manipulation; which was consequential in low capacity utilization, reduced
productivity, failure to innovate, and complex decision-making processes on vital issues of
development.
By the end of the 1980s, the growth of the PSE's had turned into, as expressed by some
commentators, an "end in itself". These factors became an obstacle to the growth of India.
Therefore, the poor performance of the PSE's called for reforms to address the weakness in India's
development. After the change of Government in 1991, among many economic reforms launched;
privatization was one, which focused on the efforts required to be taken to curtail the fiscal burden
of the state by reducing public sector borrowings and bring in fiscal austerity

What is the disinvestment policy followed in India?

- A separate team under the Ministry of Finance handles all the disinvestment-related tasks
called the Department of Disinvestment. The department is now made a separate entity
called the Department of Investment and Public Asset Management.
- The targets of the department are set in every Union Budget and may vary every year. Since
the 1990s, all the successive governments have been setting a disinvestment target to raise
funds by selling a stake in PSUs.
- The government inspects several factors, such as the government’s existing stake in a
company, the private sector’s interest in ownership of the enterprise, market conditions,
expected value realisation, before deciding in disinvesting a company.
Disinvestment Types

- Minority disinvestment
A minority disinvestment is one such that, at the end of it, the government retains a majority stake
in the company, typically greater than 51%, thus ensuring management control.
Examples of minority sales via auctioning to institutions go back into the early and mid 90s. Some of
them were Andrew Yule & co. Ltd., CMC Ltd etc. Examples of minority sales via offer for sale include
recent issues of power Grid Corp. Of India Ltd., Rural Electrification corp. Ltd., NTPC Ltd., NHPC Ltd.
Etc. The present government has made a policy statement for FY 2018-19 that all disinvestments
would only be minority disinvestments through public offerings.
- Majority disinvestment
A majority disinvestment is one in which the government, post disinvestment, retains a minority
stake in the company i.e. it sells off a majority stake. Historically, majority disinvestments have been
typically made to strategic partners. These partners could be other CPSEs themselves, a few
examples being BRPL to IOC, and KRL to BPCL. Alternatively, these strategic partners can be private
entities, like the sale of Modern Foods to Hindustan Lever Ltd., CMC to Tata Consultancy Services
Ltd. (TCS). Also, same as in the case of minority disinvestment, in majority disinvestment cases the
stake can also be offloaded by way of an Offer for Sale, separately or in conjunction with a sale to a
strategic partner.
 - Complete privatization
Complete privatization is a form of majority disinvestment wherein 100% control of the company is
passed on to a buyer. Examples of this include 18 hotel properties of ITDC and 3 hotel properties of
HCL. Disinvestment and privatization are often loosely used interchangeably. There is, however, a
vital difference between the two. Disinvestment may or may not result in privatization. When the
government retains 26% of the shares carrying voting powers while selling the remaining to a
strategic buyer, it would have disinvested, but would not have ‘privatized’, because, with 26%, it
can still stall vital decisions for which generally a a special resolution (three-fourths majority) is
required.
- Privatization and disinvestment
Privatization implies a change in ownership, resulting in a change in management. The privatization
of public sector enterprises will occur only when govt. sells more than 51% of its ownership to
private entrepreneurs. Disinvestment, on the other hand, has a much wider connotation as it could
either involve dilution of govt. stake to a level that results in a transfer of management or could also
be limited to such a level as would permit govt. to retain control over the organization.
Disinvestment beyond 50% involves the transfer of management, whereas disinvestment below
50% would result in the govt. continuing to have a major say in the undertaking.

Regulations of M & A in India

1. The Companies Act 2013-

• Replaced by Companies Act 1956
• The concept of merger & amalgamation is fully explained
• It helps in overall process of merger, acquisition and restructuring, facilitate domestic &
cross- border M&A
• The power given to the high court to sanction M&A is now invested with National Company
Law Tribunal (NCLT), making the time taken in obtaining sanctions for M&A short.
• Companies to send a notice of meeting to approve a M&A to Central Government, Income
Tax Department, SEBI, RBI, Registrar of Companies, Stock Exchange, official liquidator, CCI
etc., seeking representation from respective authorities within 30 days from date of receipt
of notice.
• Fast track mergers provision between two un-related small companies and group of
companies & subsidiaries without approaching NCLT.
• Permits cross border merger between Indian and foreign companies.

2. The Competition Act 2002-

• Regulated by Competition Commission of India
• Replaced the extant law, MRTP Act 1969
• Prohibits abuse of dominance, acquisitions, mergers and amalgamation that have or are
likely to have an adverse effect on competition in a market in India (Horizontal/Vertical
agreements)
• Proposal to enter a combination should be notified to CCI within 7 days of approval of
proposal relating to M&A
• The Competition Appellate tribunal (COMPAT) is a quasi-judicial body constituted under the
Competition Act 2002.
• Penalties of up to 10% on infringements.

3. The Income Tax Act 1961-

• The benefits under the Act are availed if all assets & liabilities of the target firm should be
transferred to the acquiring firm and shareholders of not less than 90% of the share of target
firm should become shareholders of acquiring firm
• Transfer of assets representing capital expenditures from target to acquirer are deductible in
 the hands of acquirer under section 35 of Income Tax Act 1961
• Depreciation can be claimed on fixed assets transferred from target to acquirer. The
depreciation value may be based on consideration paid and re-valuation
• Transfer of assets from target to acquirer are exempted from capital gains tax
• Amalgamation expenses are deductible in hands of acquiring firm

4. Stamp Laws -
• Some of the States in India have enacted their own Stamp Acts whereas others have
adopted the Indian Stamp Act, 1899 with their respective state amendments.
• Conveyance is defined as every instrument by which property, whether moveable or
immovable, is transferred inter vivos and which is not otherwise specifically provided
• Several states such as Rajasthan, Maharashtra, Gujarat and Haryana etc. have specifically
included a court order approving a scheme of merger and amalgamation under the
definition of "conveyance", imposition of Stamp Duty on orders of NCLT approving the
scheme of merger of companies.

5. Industry Specific Regulations -

• Legislations such as Banking Regulation Act 1949, Insurance Act 1938, Mines & Minerals Act
1957 and Drugs & Cosmetics Act 1940 would apply to transactions involving Indian
companies operating in relevant sector
• In case of highly regulated sectors such as Insurance Regulatory and Development Authority
of India and RBI, respectively lay guidelines operating in relevant sectors

6. SEBI Takeover Code 2011-

• The Securities & Exchange Board of India (SEBI) regulates M&A transactions involving
entities listed on recognised stock exchanges in India
• SEBI Takeover Code 2011 regulated both direct & indirect acquisitions of shares, voting
rights and control in listed companies that are traded over the stock market
• An acquirer holding 24.99% shares will have a better chance to block any decision of the
company which requires a special resolution to be passed.
• An acquirer, holding 25% or more but less than the maximum permissible limit, can
purchase additional shares or voting rights of up to 5% every financial year, without
requiring making a public announcement for open offer.
• Acquirer with a 25% shareholding and increasing it by another 26% through the open offer
can accrue 51% shareholding and thereby attain simple majority in the target company.

Foreign Exchange Management Act, 1999-

Followed by Foreign Exchange Regulation Act (FERA), 1973
• The Reserve Bank of India is responsible for the formulation and enforcement of foreign
exchange regulations.
• Under FDI Policy, an overseas investor can make an investment in India either under the
'automatic route (i.e. requiring any prior approval for FDI from concerned Administrative
Departments) or under 'Approval Route (i.e. requiring prior approval for FDI from concerned
Administrative Departments)
• FDI in certain sectors fall under the 'automatic route whereby investments up to 100% or a
certain prescribed cap do not require prior approval of government.\→The issuance of
securities shall be in accordance with the pricing guidelines, sectoral caps and other applicable
guidelines as prescribed under the Cross-Border Regulation.

Mergers and Acquisitions Across Indian Sectors

The process of mergers and acquisitions has gained substantial importance in today's corporate
world. This process is extensively used for restructuring the business organizations. In India, the
concept of mergers and acquisitions was initiated by the government bodies. Some well known
financial organizations also took the necessary initiatives to restructure the corporate sector of India
by adopting the mergers and acquisitions policies. The Indian economic reform since 1991 has opened
up a whole lot of challenges both in the domestic and international spheres. The increased
competition in the global market has prompted the Indian companies to go for mergers and
acquisitions as an important strategic choice. The trends of mergers and acquisitions in India have
changed over the years. The immediate effects of the mergers and acquisitions have also been diverse
across the various sectors of the Indian economy. Mergers and Acquisitions Across Indian Sectors
Among the different Indian sectors that have resorted to mergers and acquisitions in recent times,
telecom, finance, FMCG, construction materials, automobile industry and steel industry are worth
mentioning. With the increasing number of Indian companies opting for mergers and acquisitions,
India is now one of the leading nations in the world in terms of mergers and acquisitions. The merger
and acquisition business deals in India amounted to $40 billion during the initial 2 months in the year
2007. The total estimated value of mergers and acquisitions in India for 2007 was greater than $100
billion. It is twice the amount of mergers and acquisitions in 2006.

Mergers and Acquisitions in India: The Latest Trends

Till recent past, the incidence of Indian entrepreneurs acquiring foreign enterprises was not so
common. The situation has undergone a sea change in the last couple of years. Acquisition of foreign
companies by the Indian businesses has been the latest trend in the Indian corporate sector. There
are different factors that played their parts in facilitating the mergers and acquisitions in India.
Favourable government policies, buoyancy in economy, additional liquidity in the corporate sector,
and dynamic attitudes of the Indian entrepreneurs are the key factors behind the changing trends of
mergers and acquisitions in India. The Indian IT and ITES sectors have already proved their potential
in the global market. The other Indian sectors are also following the same trend. The increased
participation of the Indian companies in the global corporate sector has further facilitated the merger
and acquisition activities in India.

Major Mergers and Acquisitions in India Recently the Indian companies have undertaken some
important acquisitions. Some of those are as follows: Hindalco acquired Canada based Novelis. The
deal involved transaction of $5,982million. Tata Steel acquired Corus Group plc. The acquisition deal
amounted to $12,000million. Dr. Reddy's Labs acquired Beta pharm through a deal worth of
$597million.Ranbaxy Labs acquired Terapia SA. The deal amounted to $324 million. Suzlon Energy
acquired Hansen Group through a deal of $565 million. The acquisition of Daewoo Electronics Corp.
by Videocon involved transaction of $729 million. HPCL acquired Kenya Petroleum Refinery Ltd. The
deal amounted to $500 million. VSNL acquired Teleglobe through a deal of $239 million. When it
comes to mergers and acquisitions deals in India , the total number was 287from the month of
January to May in 2007. It has involved monetary transaction of US$47.37 billion. Out of these 287
merger and acquisition deals, there have been 102cross country deals with a total valuation of US
$28.19 billion

Mergers and Acquisitions in India – Mergers and acquisitions, as we know, imply an alliance of two
or more companies’ future. Where a merger leads to the formation of a new company, acquisition
leads to the purchase of a company by another, and no new company is formed.

In the recent past, India has seen great potential in the case of mergers and Acquisitions (M&A) deals.
It is being played vigorously in many industrial sectors of the economy. Many Indian companies have
been growing inorganic to gain access to new markets, and many foreign companies are targeting
Indian companies for their growth and expansion. It has spread far and wide through various verticals
on all business platforms.

The volume of M&A deals has been trending upward, particularly in pharmaceuticals, FMCG, finance,
telecom, automotive, and metals. Various factors that led to this robust growth of mergers and
acquisitions in India were liberalization, favourable government policies, economic reforms, the need
for investment, and the dynamic attitude of Indian corporations. Different degrees of openness to
foreign investors in almost all sectors have attracted this market and enabled industries to grow.

History of Mergers and Acquisitions in India

The post-World War period was regarded as an era of M&As. M&As occurred in industries like jute,
cotton textiles, sugar, banking & insurance, electricity, and tea plantations.

However, after independence, very few corporations came together during the initial years, and
when they did, it was a friendly negotiated deal. The lower number of companies involved in mergers
and acquisitions was due to the provisions of the MRTP Act 1969. Firms had to follow a pressurized
procedure to obtain approval, which was a deterrent.

Although this doesn’t mean that mergers and acquisitions in India were uncommon during this
controlled system, in some instances, the government has encouraged unions to revive ailing units.
Additionally, the creation of the Life Insurance Corporation (LIC) and nationalization of the life
insurance business resulted in the takeover of 243 insurance companies in 1956.

The concept of mergers and acquisitions in India was not very popular until 1988. This year saw an
unfriendly takeover by Swaraj Paul to overtake DCM Ltd., which later turned out to be ineffective.

After the economic reforms that took place in 1991, there were considerable challenges in front of
Indian industries both nationally as well as internationally. The intense competition compelled Indian
companies to opt for M&A, which later became a vital option for them to expand horizontally and
vertically. Indian corporate enterprises started refocusing on core competence, market share, global
competitiveness, and consolidation.

The early nineties saw M&A transactions led by Indian IT and pharmaceutical firms primarily to place
themselves near their significant clients in other developed economies and break into new markets
for expansion.

Against this backdrop, Indian corporate enterprises undertook restructuring exercises primarily
through M&A to create a formidable presence and expand their core areas of interest. Since then,
India has been considered one of the top countries entering mergers and acquisitions, and there has
been no looking back. However, the complications involved in the acquisition process have also
increased, caused by evolving legal frameworks, funding concerns, and competition norms
constraining the deal’s success.

Drivers of Mergers and Acquisitions in India

• Right to entry: Acquisitions abroad permit Indian companies to gain access to developed
markets across the globe.
• Technology transfer: This is one of the main advantages and drivers that urge companies to
get into M&A deals. Corporations often require technologies to manufacture a particular
product or service unavailable in India. In such situations, acquiring/collaborating with
companies abroad gives them access to the technologies.
• New Product Mix: It is often not profitable for companies to manufacture products themselves
due to cost constraints or requirements of huge investments. In such a scenario, an alliance
with another company can give them the right to sell and diversify their product range.
• Hedging Country Risks: Companies also attempt to reduce their reliance on the Indian markets
and escape the local business cycles through mergers and acquisitions.

Recent Trends of Mergers and Acquisitions in India

Various factors facilitate mergers and acquisitions in India. Government policies, resilience in the
economy, liquidity in the corporate sector, and vigorous attitudes of Indian businessmen are the
critical factors behind the fluctuating trends of mergers and acquisitions in India.

Considering the trends in previous years, the Year 2012 saw a slowdown in mergers and acquisitions
in India. It hit a three-year low by almost 61% from its preceding year. This was majorly caused by the
challenging macroeconomic climate created due to the eurozone crisis and other domestic reasons
such as inflation, fiscal deficit, and currency depreciation. However, that year also saw a critical trend
that emerged: the increase in domestic deals compared to cross-border M&As. The domestic
agreement value stood at USD 9.7 billion, up by almost 50.9% compared to 2011.
This year, 2014, has started positively for inbound M&A deals in India, which has seen 15 deals in the
first two months. The general elections due in the coming months would significantly impact mergers
and acquisitions in India. Though the investment sentiments have improved, foreign companies await
the effect of elections before investing money in India. The country is strong enough in its rudiments,
which will drive its business and economic growth.

Challenges to Mergers and Acquisitions in India

With the increase in the number of M&A deals in India, the legal environment is increasingly
becoming more and more refined. M&A forms a significant part of the economic transactions in the
Indian economy. There are a few challenges with mergers and acquisitions in India, which have been
discussed below;

1. Regulatory Ambiguity: M&A laws and regulations are still developing and trying to catch up with
the global M&A scenario. However, because of these reasons, interpreting these laws sometimes
goes for a toss since there is ambiguity in understanding them.

Several regulators interpreting the same concept differently increase confusion in the minds of
foreign investors. If the Indian system wants to attract investments from foreign economies, it must
resolve the issue adversely affecting deal certainty.

2. Legal Developments: There have been consistently new legal developments, such as the
Competition Act 2002, the restored SEBI Takeover Regulations in 2011, and the notification of limited
sections of the new Companies Act 2013, which have led to issues in India relating to their
interpretations and effect on the deals valuations and process.

3. Shareholder Involvement: Institutional investors in the minority position have actively observed
the investee companies. Proxy advisory companies closely scrutinize the related party transactions,
several executives’ appointments, and remuneration. In some cases, the approval of minority
shareholders is necessary. After revamping, the powers of minority shareholders now include the
ability to sue the company for oppression and mismanagement.

These issues challenge the growth of mergers and acquisitions in India, which needs thoughtful
attention from the government to make our market attractive for foreign investment.

On a positive note Confederation of Indian Industry (CII), the Reserve Bank of India (RBI), and the
Securities and Exchange Board of India (SEBI) – the three primary regulators of mergers and
acquisition activities – have been striving hard to liberalize further the norms that have been one of
the most significant contributors to the country’s industrial expansion.

Major Mergers and Acquisitions in India

• Bharti Airtel acquired Kuwait-based Zain Telecom’s African business for USD 10.7 billion,
considered the largest-ever cross-border deal in an emerging market.
• The biggest deal in the Pharmaceutical sector was acquiring the generic drug unit of Piramal
Health Care by USA-based Abbot Laboratories (ABT) for USD 3720 million.
• In the Banking, Financial Services, and Insurance sectors, the biggest deal was by Hinduja
group, when it acquired Luxembourg-based KBL European Private Bankers SA for USD 1.69
billion.
• Tata Chemicals took over British salt based in the UK with a deal of US $ 13 billion. Tata made
one of the most successful mergers and acquisitions in 2010, which gave them even more
power and vital access to British Salt’s facilities. British Salt annually produces about 800,000
tons of pure white salt from its facilities.
• The merger of Reliance Power and Reliance Natural Resources in a deal of US $11 billion is
another big deal in the Indian industry. This merger enabled convenience Reliance Power to
handle all its power projects as it now enjoys easy accessibility to natural gas.
• In domestic mergers, ICICI Bank’s acquisition of Bank of Rajasthan at about Rs 3000 Crore was
a great move by ICICI to enhance its market share across the Indian boundaries, especially in
northern and western regions.
• The takeover of Corus by Tata Steel in 2007 is considered the most prominent Indian takeover,
with a deal value worth $7.6 billion, making Tata Steel the fifth largest steel company.
• Vodafone has acquired a 52% interest in Hutchison Essar from the Hong Kong-based
Hutchison Telecommunications International for about US$10.83 billion.
• Imperial Energy, India’s biggest exploration company, Oil and Natural Gas Corporation
(ONGC), bought Imperial Energy Plc for $2.58 billion to tap Siberian deposits and compensate
for diminishing output at home.
• Aditya Birla Group’s Hindalco Industries, India’s largest non-ferrous metals company, acquired
the Canada-based firm Novalis in an all-cash transaction for $6 billion.
• In 2008, Tata acquired Britain’s most famous automobile manufacturers, Jaguar and Land
Rover, in a $2.3 billion contract with Ford, their American owner.
• Subhash Chandra’s Essel Packaging (EPL) acquired the Swiss tube packaging major Propack to
become the world’s largest in laminated tubes.
• In 2006, Ranbaxy Laboratories(RLL) created news when it announced the acquisition of 3 drug
makers in Europe, all within a week. Allen S.p.A, a GlaxoSmithKline (GSK) division in Italy,
Romania’s largest independent generic drug producer, Terapia, and drug maker Ethimed NV
in Belgium.
• In 2007, Pharmaceutical and biotechnology major Wockhardt bought the fourth largest
independent, integrated pharmaceutical group in France, Negma Laboratories. At a deal of
$265 million, Wockhardt became the most prominent Indian pharmaceutical company in
Europe, with more than 1,500 employees based in the continent.
• In 2008, Bennett Coleman & Co, India’s largest media group and the holding company of the
Times of India group, bought Virgin Radio in the UK in a $53.2 million deal with SMG Plc.
• Mahindra & Mahindra acquired 90 percent of Schoneweiss, a leading company in the forging
sector in Germany. The deal took place in 2007 and consolidated Mahindra’s position in the
global market.
• Sterlite Industries, a part of the Vedanta Group 2008, signed an agreement regarding acquiring
copper mining company Asarco for $ 2.6 billion.

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