48738970 mergers project

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Effects of

Mergers & acquisition

OnPerformance of company

Submitted By:

Nupur Agrawal &

Navneet Bhatia

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Table of contents

Sr.

Title Page no.

No.

1 Introduction 2

Mergers: meaning, definition and what mergers2 4

actually mean

3 Mergers vs. acquisitions 6

4 Purpose of mergers 7

5 Reasons why companies merge 9

6 Motivation for mergers 13

7 Types of mergers 16

8 Concerns for mergers 18

9 Steps in bringing about mergers of companies 20

10 Legal procedure for mergers 2211 Corporate merger procedure 24

12 Why mergers fail? 24

Cases of mergers 25

13 Case 1: Arcelor-Mittal merger 25

Case 2: deutsche-Dresdner bank merger 27

14 references 29

Introduction

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We have been learning about the companies coming together to from

another company and companies taking over the existing companies to

expand their business.

With recession taking toll of many Indian businesses and the feeling of

insecurity surging over our businessmen, it is not surprising when we

hear about the immense numbers of corporate restructurings taking

place, especially in the last couple of years. Several companies have

been taken over and several have undergone internal restructuring,whereas certain companies in the same field of business have found it

beneficial to merge together into one company.

In this context, it would be essential for us to understand what corporate

restructuring and mergers are all about.

All our daily newspapers are filled with cases of mergers, acquisitions,

spin-offs, tender offers, & other forms of corporate restructuring. Thus

important issues both for business decision and public policy formulation

have been raised. No firm is regarded safe from a takeover possibility.On the more positive side Mergers may be critical for the healthy

expansion and growth of the firm. Successful entry into new product and

geographical markets may require Mergers at some stage in the firm's

development. Successful competition in international markets may

depend on capabilities obtained in a timely and efficient fashion through

Mergers. Many have argued that mergers increase value and efficiency

and move resources to their highest and best uses, thereby increasing

shareholder value.

To opt for a merger or not is a complex affair, especially in terms of thetechnicalities involved. We have discussed almost all factors that the

management may have to look into before going for merger.

Considerable amount of brainstorming would be required by the

managements to reach a conclusion. e.g. a due diligence report would

clearly identify the status of the company in respect of the financial

position along with the net worth and pending legal matters and details

about various contingent liabilities. Decision has to be taken after having

discussed the pros & cons of the proposed merger & the impact of the

same on the business, administrative costs benefits, addition to

shareholders' value, tax implications including stamp duty and last butnot the least also on the employees of the Transferor or Transferee

Company.

Corporate restructuring refers to a broad array of activities that

expands or contracts a firms operation or substantially modify its

financial structure or bring about a significant change in its3


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organizational structure and internal functioning. It includes mergers,

takeovers, acquisitions, slump sales, demergers etc.

Mergers, acquisitions and restructuring have become a major force in

the financial and economic environment all over the world. Essentially

an American phenomenon till mid-1970s, they have become a dominant

global business theme since then.

On the Indian scene, too, corporates are seriously looking at mergers,acquisitions and restructuring which has indeed become the order of the

day. The pace of corporate restructuring has increased since the

beginning of the liberalization era, thanks to greater competitive

pressures and a more permissive environment.

Mergers, acquisitions and restructuring evoke a great deal of public

interest and perhaps represent the most dramatic facet of corporate

finance. This report discusses various facets of mergers.

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Mergers

Meaning

A merger is a combination of two companies where one corporation is

completely absorbed by another corporation. The less importantcompany loses its identity and becomes part of the more important

corporation, which retains its identity.

Merger Law Definition

1. In contract law, the action of superceding all prior written or oral

agreements on the same subject matter.2. In criminal law, the inclusion of a lesser offense within a more

serious one, rather than charging it separately, this might cause

double jeopardy.3. In litigation, the doctrine that all of the plaintiffs prior claims are

superceded by the judgment in the case, which becomes the

plaintiffs sole means of recovering from the defendant.

4. The combination under modern codes of civil procedure of law and

equity into a single court.

5. In corporate law, the acquisition of one company by another, and

their combination into a single legal entity.

What Mergers actually mean:

A merger is a combination of two companies where one corporation is

completely absorbed by another corporation. It may involve absorption

or consolidation.

In absorption one company acquires another company. For example,

Hindustan Lever Limited acquired Tata Oil Mills Company.

In consolidation, two or more companies combine to form a new

company. For example, Hindustan Computers Limited, Hindustan

Instruments Limited, Indian Software Company Limited, and Indian

Reprographics Limited combined to form HCL Limited.

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The less important company loses its identity and becomes part of the

more important corporation, which retains its identity. A merger

extinguishes the merged corporation, and the surviving corporation

assumes all the rights, privileges, and liabilities of the merged

corporation. A merger is not the same as a consolidation, in which two

corporations lose their separate identities and unite to form a

completely new corporation. In India mergers are called amalgamations

in legal parlance.

Federal laws regulate mergers. Regulation is based on the concern that

mergers inevitably eliminate competition between the merging firms.

This concern is most acute where the participants are direct rivals,

because courts often presume that such arrangements are more prone

to restrict output and to increase prices. The fear that mergers and

acquisitions reduce competition has meant that the government

carefully scrutinizes proposed mergers. On the other hand, since the

1980s, the federal government has become less aggressive in seeking

the prevention of mergers.

Despite concerns about a lessening of competition, firms are relatively

free to buy or sell entire companies or specific parts of a company.

Mergers and acquisitions often result in a number of social benefits.

Mergers can bring better management or technical skill to bear on

underused assets. They also can produce economies of scale and scope

that reduce costs, improve quality, and increase output. The possibility

of a takeover can discourage company managers from behaving in ways

that fail to maximize profits. A merger can enable a business owner to

sell the firm to someone who is already familiar with the industry and

who would be in a better position to pay the highest price. The prospectof a lucrative sale induces entrepreneurs to form new firms.

Antitrust merger law seeks to prohibit transactions whose probable

anticompetitive consequences outweigh their likely benefits. The critical

time for review usually is when the merger is first proposed. This

requires enforcement agencies and courts to forecast market trends and

future effects. Merger cases examine past events or periods to

understand each merging party's position in its market and to predict

the merger's competitive impact.

Merger is also defined as amalgamation. Merger is the fusion of two or

more existing companies. All assets, liabilities and the stock of one

company stand transferred to Transferee Company in consideration of

payment in the form of:

Equity shares in the transferee company,

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Debentures in the transferee company,

Cash, or

A mix of the above mode

Mergers vs. Acquisitions

These terms are commonly used interchangeably but in reality, they

have slightly different meanings. An acquisition refers to the act of one

company taking over another company and clearly becoming the newowner. From a legal point of view, the target company, the company

that is bought, no longer exists. Acquisition in general sense is acquiring

the ownership in the property. In the context of business combinations,

an acquisition is the purchase by one company of a controlling interest

in the share capital of another existing company.

A merger is a joining of two companies that are usually of about the

same size and agree to meld into one large company. In the case of a

merger, both companys stocks cease to be traded as the new company

chooses a new name and a new stock is issued in place of the two

separate companys stock. This view of a merger is unrealistic by realworld standards as it is often the case that one company is actually

bought by another while the terms of the deal that is struck between the

two allows for the company that is bought to publicize that a merger has

occurred while the company that is doing the buying backs up this

claim. This is done in order to allow the company that is bought to save

face and avoid the negative connotations that go along with selling out

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Purpose of Mergers:

Purposes for mergers are short listed below: -

(1)Procurement of supplies:

To safeguard the source of supplies of raw materials or intermediary

product; to obtain economies of purchase in the form of discount,savings in transportation costs, overhead costs in buying department,

etc.

To share the benefits of suppliers economies by standardizing the

materials

(2)Revamping production facilities:

To achieve economies of scale by amalgamating production facilities

through more intensive utilization of plant and resources;

To standardize product specifications, improvement of quality ofproduct, expanding market and aiming at consumers satisfaction

through strengthening after sale services;

To obtain improved production technology and know-how from the

offeree company

To reduce cost, improve quality and produce competitive products to

retain and improve market share.

(3) Market expansion and strategy:

To eliminate competition and protect existing market;To obtain a new market outlets in possession of the offeree;

To obtain new product for diversification or substitution of existing

products and to enhance the product range;

Strengthening retain outlets and sale the goods to rationalize

distribution;

To reduce advertising cost and improve public image of the offeree

company;

Strategic control of patents and copyrights

(4) Financial strength:

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business combinations. The combining corporates aim at circular

combinations by pursuing this objective.

(9) Desired level of integration:

Mergers and acquisition are pursued to obtain the desired level of

integration between the two combining business houses. Suchintegration could be operational or financial. This gives birth to

conglomerate combinations. The purpose and the requirements of the

offeror company go a long way in selecting a suitable partner for merger

or acquisition in business combinations.

Reasons why companies merge:

The principal economic rationale of a merger id that the value of thecombined entity is expected to be greater than the sum of the

independent values of the merging entities. For example, if firms A and

B merge, the value of the combined entity, V (AB), is expected to be

greater than (VA+VB), the sum of the independent values of A and B.

A variety of reasons like growth, diversification, economies of scale,

managerial effectiveness and so on are cited in support of merger

proposals. Some of them appear to be plausible in the sense that they

create value; others seem to be dubious as they dont create value.

Plausible reasons:

The most plausible reasons in favor of mergers are strategic benefits,

economies of scale, economies of scope, economies of vertical

integration, complementary resources, tax shields, utilization of surplus

funds, and managerial effectiveness.

Strategic benefit:

As a pre-emptive move it can prevents competitor from

establishing a similar position in that industry.

It offers a special timing advantage because the merger

alternative enables the firm to leap frog several stages in the

process of expansion.

It may entail less risk and even less cost

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In a saturated market, simultaneous expansion and

replacement (through merger) makes more sense than creation

of additional capacity through internal expansion

Economies of scale:

When two or more firms combine, certain economies are realized due to

larger volume of operations of the combined entity. These economies

arise because of more intensive utilization of production capacity,distribution networks, and research and development facilities, data

processing systems and so on. Economies of scale are prominent in

horizontal mergers where the scope of more intensive utilization of

resources is greater. Even in conglomerate mergers there is scope for

reduction of certain overhead expenses.

Economies of scope:

A company may use a specific set of skills or assets that it possesses to

widen the scope of its activities. For example: proctor and gamble canenjoy economies or scope if it acquires a consumer product company

that benefits from its highly regarded consumer marketing skills.

Economies of vertical integration:

When companies engaged at different stages of production or value

chain merge, economies of vertical integration may be realized. For

example, the merger of a company engaged in oil exploration and

production (like ONGC) with a company engaged in refining andmarketing (like HPCL) may improve co-ordination and control.

Vertical integration, however, is not always a good idea. If a company

does everything in-house it may not get the benefit of outsourcing from

independent suppliers who may be more efficient in their segments of

the value chain.

Complementary resources:

If two firms have complementary resources, it may make sense for them

to merge. A good example of a merger of companies whichcomplemented each other well is the merger of Brown Bovery and Asea

that resulted in AseaBrownBovery (ABB). Brown Bovery was

international, where as Asea was not. Asea excelled in management,

whereas Brown Bovery did not. The technology, markets, and cultures of

the two companies fitted well.

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Tax shields:

When a firm with accumulated losses and/or unabsorbed depreciation

merges with a profit making firm, tax shields are utilized better. The firm

with accumulated losses and/or unabsorbed depreciation may not be

able to derive tax advantages for a long time. However, when it merges

with a profit making firm, its accumulated losses and/or unabsorbed

depreciation can be set off against the profits of the profit making firm

and the tax benefits can be quickly realized.

Utilization of surplus funds:

A firm in a mature industry may generate a lot of cash but may not have

opportunities for profitable investment. Such a firm ought to distribute

generous dividends and even buy back its shares, if the same is

possible. However, most managements have a tendency to make further

investments, even though they may not be profitable. In such a

situation, a merger with another firm involving cash compensation oftenrepresents a more efficient utilization of surplus funds.

Managerial effectiveness:

One of the potential gains of merger is an increase in managerial

effectiveness. This may occur if the existing management team, which is

performing poorly, is replaced by a more effective management team.

Another allied benefit of a merger may be in the form of greater

congruence between the interests of the managers and the share

holders.

Dubious Reasons:

Often mergers are motivated by a desire to diversify and lower financing

costs. Prima facie, these objectives look worthwhile, but they are not

likely to enhance value.

Diversification:

A commonly stated motive for mergers is to achieve risk reduction

through diversification. The extent, to which risk is reduced, of course,

depends on the correlation between the earnings of the merging

entities. While negative correlation brings greater reduction in risk,

positive correlation brings lesser reduction in risk.12


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Corporate diversification, however, may offer value in at least two

special cases

1) If a company is plagued with problems which can jeopardize its

existence and its merger with another company can save it from

potential bankruptcy.

2) If investors do not have the opportunity of home made

diversification because one of the companies is not traded in the

marketplace, corporate diversification may be the only feasible

route to risk reduction.

Lower financing costs:

The consequence of larger size and greater earnings and stability, manyargue, is to reduce the cost of borrowing for the merged firm. The

reason for this is that the creditors of the merged firm enjoy better

protection than the creditors of the merging firms independently.

Increase Supply-Chain Pricing Power:

By buying out one of its suppliers or one of the distributors, a business

can eliminate a level of costs. If a company buys out one of itssuppliers, it is able to save on the margins that the supplier was

previously adding to its costs; this is known as a vertical merger. If a

company buys out a distributor, it may be able to ship its products at a

lower cost.

Eliminate Competition:

Many M&A deals allow the acquirer to eliminate future competition andgain a larger market share in its product's market. The downside of

this is that a large premium is usually required to convince the target

company's shareholders to accept the offer. It is not uncommon for the

acquiring company's shareholders to sell their shares and push the price

lower in response to the company paying too much for the target

company.

Synergy:

The most used word in M&A is synergy, which is the idea that by

combining business activities, performance will increase and costs will

decrease. Essentially, a business will attempt to merge with another

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business that has complementary strengths and weaknesses.

Motivations for mergers

Mergers are permanent form of combinations which vest in

management complete control and provide centralized

administration which are not available in combinations of holding

company and its partly owned subsidiary. Shareholders in the

selling company gain from the merger and takeovers as the

premium offered to induce acceptance of the merger or takeover

offers much more price than the book value of shares.

Shareholders in the buying company gain in the long run with the

growth of the company not only due to synergy but also due to

boots trapping earnings.

Mergers are caused with the support of shareholders, managers ad

promoters of the combing companies. The factors, which motivate

the shareholders and managers to lend support to these

combinations and the resultant consequences they have to bear,

are briefly noted below based on the research work by various

scholars globally.

(1) From the standpoint of shareholders

Investment made by shareholders in the companies subject to

merger should enhance in value. The sale of shares from one

companys shareholders to another and holding investment in

shares should give rise to greater values i.e. the opportunity gains

in alternative investments. Shareholders may gain from merger in

different ways viz. from the gains and achievements of the

company i.e. through

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Realization of monopoly profits;

Economies of scales;

Diversification of product line;

Acquisition of human assets and other resources not available

otherwise;

Better investment opportunity in combinations.

One or more features would generally be available in

each merger where shareholders may have attraction and favor

merger.

(2) From the standpoint of managers

Managers are concerned with improving operations of the

company, managing the affairs of the company effectively for all

round gains and growth of the company which will provide them

better deals in raising their status, perks and fringe benefits.

Mergers where all these things are the guaranteed outcome get

support from the managers. At the same time, where managers

have fear of displacement at the hands of new management in

amalgamated company and also resultant depreciation from the

merger then support from them becomes difficult.

(3) Promoters gains

Mergers do offer to company promoters the advantage of

increasing the size of their company and the financial structure and

strength. They can convert a closely held and private limited

company into a public company without contributing much wealth

and without losing control.

(4) Benefits to general public

Impact of mergers on general public could be viewed as aspect of

benefits and costs to:Consumer of the product or services;

Workers of the companies under combination;

General public affected in general having not been user or

consumer or the worker in the companies under merger plan.

(a) Consumers

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The economic gains realized from mergers are passed on to consumers

in the form of lower prices and better quality of the product which

directly raise their standard of living and quality of life. The balance of

benefits in favor of consumers will depend upon the fact whether or not

the mergers increase or decrease competitive economic and productive

activity which directly affects the degree of welfare of the consumers

through changes in price level, quality of products, after sales service,

etc.

(b) Workers community

The merger or acquisition of a company by a conglomerate or other

acquiring company may have the effect on both the sides of increasing

the welfare in the form of purchasing power and other miseries of life.

Two sides of the impact as discussed by the researchers and

academicians are: firstly, mergers with cash payment to shareholders

provide opportunities for them to invest this money in other companieswhich will generate further employment and growth to uplift of the

economy in general. Secondly, any restrictions placed on such mergers

will decrease the growth and investment activity with corresponding

decrease in employment. Both workers and communities will suffer on

lessening job opportunities, preventing the distribution of benefits

resulting from diversification of production activity.

(c) General public

Mergers result into centralized concentration of power. Economic poweris to be understood as the ability to control prices and industries output

as monopolists. Such monopolists affect social and political environment

to tilt everything in their favor to maintain their power ad expand their

business empire. These advances result into economic exploitation. But

in a free economy a monopolist does not stay for a longer period as

other companies enter into the field to reap the benefits of higher prices

set in by the monopolist. This enforces competition in the market as

consumers are free to substitute the alternative products. Therefore, it is

difficult to generalize that mergers affect the welfare of general public

adversely or favorably. Every merger of two or more companies has tobe viewed from different angles in the business practices which protects

the interest of the shareholders in the merging company and also serves

the national purpose to add to the welfare of the employees, consumers

and does not create hindrance in administration of the Government

polices.

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Types of mergers:

Merger depends upon the purpose of the offeror company it wants to

achieve. Based on the offerors objectives profile, combinations could be

vertical, horizontal, circular and conglomeratic as precisely described

below with reference to the purpose in view of the offeror company.

(A) Vertical combination:

A company would like to takeover another company or seek its merger

with that company to expand espousing backward integration to

assimilate the resources of supply and forward integration towards

market outlets. The acquiring company through merger of another unit

attempts on reduction of inventories of raw material and finished goods,

implements its production plans as per the objectives and economizes

on working capital investments. In other words, in vertical combinations,

the merging undertaking would be either a supplier or a buyer using itsproduct as intermediary material for final production.

The following main benefits accrue from the vertical combination to the

acquirer company i.e.

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1. It gains a strong position because of imperfect market of the

intermediary products, scarcity of resources and purchased

products;

2. Has control over products specifications.

(B) Horizontal combination:

It is a merger of two competing firms which are at the same stage of

industrial process. The acquiring firm belongs to the same industry as

the target company. The mail purpose of such mergers is to obtain

economies of scale in production by eliminating duplication of facilities

and the operations and broadening the product line, reduction in

investment in working capital, elimination in competition concentration

in product, reduction in advertising costs, increase in market segments

and exercise better control on market.

(C) Circular combination:

Companies producing distinct products seek amalgamation to share

common distribution and research facilities to obtain economies by

elimination of cost on duplication and promoting market enlargement.

The acquiring company obtains benefits in the form of economies of

resource sharing and diversification.

(D) Conglomerate combination:

It is amalgamation of two companies engaged in unrelated industries

like DCM and Modi Industries. The basic purpose of such amalgamations

remains utilization of financial resources and enlarges debt capacity

through re-organizing their financial structure so as to service the

shareholders by increased leveraging and EPS, lowering average cost of

capital and thereby raising present worth of the outstanding shares.

Merger enhances the overall stability of the acquirer company and

creates balance in the companys total portfolio of diverse products andproduction processes.

Some more types of mergers:

Market-extension Merger

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This involves the combination of two companies that sell the same

products in different markets. A market-extension merger allows for the

market that can be reached to become larger and is the basis for the

name of the merger.

Product-extension Merger

This merger is between two companies that sell different, but somewhat

related products, in a common market. This allows the new, larger

company to pool their products and sell them with greater success to

the already common market that the two separate companies shared.

Accretive mergers

Those in which an acquiring company's earnings per share (EPS)

increase. An alternative way of calculating this is if a company with ahigh price to earnings ratio (P/E) acquires one with a low P/E.

Concerns of mergers

Horizontal, vertical, and conglomerate mergers each raise distinctive

competitive concerns.

Horizontal Mergers Horizontal mergers raise three basic competitive

problems. The first is the elimination of competition between the

merging firms, which, depending on their size, could be significant. The

second is that the unification of the merging firms' operations mightcreate substantial market power and might enable the merged entity to

raise prices by reducing output unilaterally. The third problem is that, by

increasing concentration in the relevant market, the transaction might

strengthen the ability of the market's remaining participants to

coordinate their pricing and output decisions. The fear is not that the

entities will engage in secret collaboration but that the reduction in the

number of industry members will enhance tacit coordination of behavior.

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Vertical Mergers Vertical mergers take two basic forms: forward

integration, by which a firm buys a customer, and backward integration,

by which a firm acquires a supplier. Replacing market exchanges with

internal transfers can offer at least two major benefits. First, the vertical

merger internalizes all transactions between a manufacturer and its

supplier or dealer, thus converting a potentially adversarial relationship

into something more like a partnership. Second, internalization can give

management more effective ways to monitor and improve performance.

Vertical integration by merger does not reduce the total number ofeconomic entities operating at one level of the market, but it might

change patterns of industry behavior. Whether a forward or backward

integration, the newly acquired firm may decide to deal only with the

acquiring firm, thereby altering competition among the acquiring firm's

suppliers, customers, or competitors. Suppliers may lose a market for

their goods; retail outlets may be deprived of supplies; or competitors

may find that both supplies and outlets are blocked. These possibilities

raise the concern that vertical integration will foreclose competitors by

limiting their access to sources of supply or to customers. Vertical

mergers also may be anticompetitive because their entrenched marketpower may impede new businesses from entering the market.

Conglomerate Mergers Conglomerate transactions take many forms,

ranging from short-term joint ventures to complete mergers. Whether a

conglomerate merger is pure, geographical, or a product-line extension,

it involves firms that operate in separate markets. Therefore, a

conglomerate transaction ordinarily has no direct effect on competition.There is no reduction or other change in the number of firms in either

the acquiring or acquired firm's market.

Conglomerate mergers can supply a market or "demand" for firms, thus

giving entrepreneurs liquidity at an open market price and with a key

inducement to form new enterprises. The threat of takeover might force

existing managers to increase efficiency in competitive markets.

Conglomerate mergers also provide opportunities for firms to reduce

capital costs and overhead and to achieve other efficiencies.

Conglomerate mergers, however, may lessen future competition by

eliminating the possibility that the acquiring firm would have enteredthe acquired firm's market independently. A conglomerate merger also

may convert a large firm into a dominant one with a decisive

competitive advantage, or otherwise make it difficult for other

companies to enter the market. This type of merger also may reduce the

number of smaller firms and may increase the merged firm's political

power, thereby impairing the social and political goals of retaining20


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independent decision-making centers, guaranteeing small business

opportunities, and preserving democratic processes.

Steps in bringing about mergers of

companies

Due diligence:

Its a term used for a number of concepts involving either the

performance of an investigation of a business or person, or the

performance of an act with a certain standard of care. It can be a legal

obligation, but the term will more commonly apply to voluntary

investigations. A common example of due diligence in various industriesis the process through which a potential acquirer evaluates a targetcompany or its assets for acquisition.

Origin of the term "Due Diligence":

The term "Due Diligence" first came into common use as a result of the

US Securities Act of 1933.

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The US Securities Act included a defense referred to in the Act as the

"Due Diligence" defense which could be used by broker-dealers when

accused of inadequate disclosure to investors of material information

with respect to the purchase of securities.

So long as broker-dealers conducted a "Due Diligence" investigation into

the company whose equity they were selling, and disclosed to the

investor what they found, they would not be held liable for nondisclosure

of information that failed to be uncovered in the process of that

investigation.The entire broker-dealer community quickly institutionalized as a

standard practice, the conducting of due diligence investigations of any

stock offerings in which they involved themselves.

Due diligence in capstone refers to performing the needful amount of

effort, as in 'doing diligence'.

Originally the term was limited to public offerings of equity investments,

but over time it has come to be associated with investigations of private

mergers and acquisitions as well. The term has slowly been adapted for

use in other situations.

Due diligence in business transactions:

In business transactions, the due diligence process varies for different

types of companies. The relevant areas of concern may include the

financial, legal, labor, tax, environment and market/commercial situation

of the company. Other areas include intellectual property, real and

personal property, insurance and liability coverage, debt instrument

review, employee benefits and labor matters, immigration, and

international transactions.

Approval by shareholders:

A meeting of share holders should be held by each company for passing

the scheme of mergers at least 75% of shareholders who vote either in

person or by proxy must approve the scheme of merger.

Authorization of the scheme by the court:

Once the drafts of merger proposal is approved by the respective

boards, each company should make an application to the high court of

the state where its registered office is situated so that it can convenethe meetings of share holders and creditors for passing the merger

proposal

Once the mergers scheme is passed by the share holders and creditors,

the companies involved in the merger should present a petition to the

HC for confirming the scheme of merger. However the HC is empowered

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to modify the scheme and pass orders accordingly. A notice about the

same has to be published in 2 newspapers.

Legal Procedure for bringing about merger

of companies

Examination of object clauses:

The MOA of both the companies should be examined to check the powerto amalgamate is available. Further, the object clause of the merging

company should permit it to carry on the business of the merged

company. If such clauses do not exist, necessary approvals of the share

holders, board of directors, and company law board are required.

Intimation to stock exchanges:

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The stock exchanges where merging and merged companies are listed

should be informed about the merger proposal. From time to time,

copies of all notices, resolutions, and orders should be mailed to the

concerned stock exchanges.

Approval of the draft merger proposal by the respective

boards:

The draft merger proposal should be approved by the respective BODs.The board of each company should pass a resolution authorizing

its directors/executives to pursue the matter further.

Application to high courts:

Once the drafts of merger proposal is approved by the respective

boards, each company should make an application to the high court of

the state where its registered office is situated so that it can convene

the meetings of share holders and creditors for passing the merger

proposal.

Dispatch of notice to share holders and creditors:

In order to convene the meetings of share holders and creditors, a

notice and an explanatory statement of the meeting, as approved by the

high court, should be dispatched by each company to its shareholders

and creditors so that they get 21 days advance intimation. The notice of

the meetings should also be published in two news papers.

Holding of meetings of share holders and creditors:

A meeting of share holders should be held by each company for passing

the scheme of mergers at least 75% of shareholders who vote either in

person or by proxy must approve the scheme of merger. Same applies

to creditors also.

Petition to High Court for confirmation and passing of HC

orders:

Once the mergers scheme is passed by the share holders and creditors,

the companies involved in the merger should present a petition to the

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HC for confirming the scheme of merger. A notice about the same has to

be published in 2 newspapers.

Filing the order with the registrar:

Certified true copies of the high court order must be filed with the

registrar of companies within the time limit specified by the court.

Transfer of assets and liabilities:

After the final orders have been passed by both the HCs, all the assets

and liabilities of the merged company will have to be transferred to the

merging company.

Issue of shares and debentures:

The merging company, after fulfilling the provisions of the law, should

issue shares and debentures of the merging company. The new shares

and debentures so issued will then be listed on the stock exchange.

Corporate merger procedure

State statutes establish procedures to accomplish corporate mergers.

Generally, the board of directors for each corporation must initially pass

a resolution adopting a plan of merger that specifies the names of the

corporations that are involved, the name of the proposed merged

company, the manner of converting shares of both corporations, andany other legal provision to which the corporations agree. Each

corporation notifies all of its shareholders that a meeting will be held to

approve the merger. If the proper number of shareholders approves the

plan, the directors sign the papers and file them with the state. The

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secretary of states issues a certificate of merger to authorize the new

corporation.

Some statutes permit the directors to abandon the plan at any point up

to the filing of the final papers. States with the most liberal corporation

laws permit a surviving corporation to absorb another company by

merger without submitting the plan to its shareholders for approval

unless otherwise required in its certificate of incorporation.

Statutes often provide that corporations that are formed in two different

states must follow the rules in their respective states for a merger to beeffective. Some corporation statutes require the surviving corporation to

purchase the shares of stockholders who voted against the merger.

Why Mergers Fail?

Revenue deserves more attention in mergers; indeed, a failure to focuson this important factor may explain why so many mergers dont pay

off. Too many companies lose their revenue momentum as they

concentrate on cost synergies or fail to focus on post merger growth in a

systematic manner. Yet in the end, halted growth hurts the market

performance of a company far more than does a failure to nail costs.

Cases of mergers of prominent companies

in the recent past

Case 1: Arcelor Mittal merger details

(Merger success)

The Merger Process

2006 was a very exciting and challenging year for Arcelor Mittal. The

new company was at the forefront of the consolidation process, leading

the industry through mergers and acquisitions.

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January 2006 Historic moment for the Global Steel Industry

The year started with the historic launch of the Mittal Steel offer to the

shareholders of Arcelor to create the world's first 100 million tonne plus

steel producer. The aim of increasing globalization and consolidation,

necessary in the steel industry, defines the deal and sets the pace for

the industry.

February 2006 - Expansion and strong results

Mittal Canada completes the acquisition of three Stelco subsidiaries, the

Norambar and Stelfil plants, located in Quebec, and the Stelwire plant in

Ontario. Stelfil and Stelwire will add 250,000 tones of steel wire to the

company's annual production capacity, providing a wider product mix to

better meet customers' needs.

Arcelor acquires a 38.41% stake in Laiwu Steel Corporation, in China.

Laiwu Steel Corporation is China's largest producer of sections and

beams, and will further boost its operational excellence thanks to this

partnership. It is still awaiting approval with the Beijing authorities.

April 2006 - Renewal after Hurricane Katrina and new galvanizedline

Out of the devastation of Hurricane Katrina, arose a revitalized

Mississippi youth baseball field, rebuilt with the help of Mittal Steel USA

and Arcelor. The company provides money towards the purchase of

lighting fixtures and steel cross bar support. It also arranges for and

donates the labor costs for their installation.

Mittal Steel USA places a new line into operation in Cleveland to provide

top-quality galvanized sheet steel to automakers and other demandingcustomers. The new line is designed to produce in excess of 630,000

tones of corrosion-resistant sheet annually, using the hot-dip galvanizing

process.

May 2006 - US clears the way for bid

Mittal Steel announces US antitrust clearance for Arcelor bid and the

approval of the offer documents by European regulators. The

acceptance period starts in Luxembourg, Belgium and France on 18 May

2006 (some days later for Spain and the United States) and lasts until 29

June 2006.

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Arcelor contributes to the first anti-seismic school building in Izmit

(Turkey), where a school building had been destroyed by an earthquake

in 1999.

June 2006 - Historic agreement to create the No.1 Global Steel

Company

Creating the world's largest steel company, Mittal Steel and Arcelor

reach an agreement to combine the two companies in a merger ofequals. The terms of the transaction were reviewed by the Boards of

Arcelor and Mittal Steel which each recommended the transaction to

their shareholders. The combined group, domiciled and headquartered

in Luxembourg, is named Arcelor Mittal.

Demonstrating the commitment to extend markets in developing

nations, a strategic partnership between Arcelor Mittal and SNI (Socit

Nationale d'Investissement) is concluded concerning the development of

Sonasid. This consolidates and develops the position of Sonasid on the

Moroccan market, allowing the company to benefit from the transfer of

Arcelor Mittal's technologies and skills in the long carbon steel productsector

Case 2: Deutsche Dresdner Bank

(Merger Failure)

The merger that was announced on March 7, 2000 between Deutsche

Bank and Dresdner Bank, Germanys largest and the third largest bank

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respectively was considered as Germanys response to increasingly

tough competition markets.

The merger was to create the most powerful banking group in the world

with the balance sheet total of nearly 2.5 trillion marks and a stock

market value around 150 billion marks. This would put the merged bank

for ahead of the second largest banking group, U.S. based Citigroup,

with a balance sheet total amounting to 1.2 trillion marks and also in

front of the planned Japanese book mergers of Sumitomo and SukuraBank with 1.7 trillion marks as the balance sheet total.

The new banking group intended to spin off its retail banking which was

not making much profit in both the banks and costly, extensive network

of bank branches associated with it.

The merged bank was to retain the name Deutsche Bank but adopted

the Dresdner Banks green corporate color in its logo. The future core

business lines of the new merged Bank included investment Banking,

asset management, where the new banking group was hoped to outsidethe traditionally dominant Swiss Bank, Security and loan banking and

finally financially corporate clients ranging from major industrial

corporation to the mid-scale companies.

With this kind of merger, the new bank would have reached the no.1

position of the US and create new dimensions of aggressiveness in the

international mergers.

But barely 2 months after announcing their agreement to form the

largest bank in the world, had negotiations for a merger between

Deutsche and Dresdner Bank failed on April 5, 2000.

The main issue of the failure was Dresdner Banks investment arm,

Kleinwort Benson, which the executive committee of the bank did not

want to relinquish under any circumstances.

In the preliminary negotiations it had been agreed that Kleinwort Benson

would be integrated into the merged bank. But from the outset these

considerations encountered resistance from the asset management

division, which was Deutsche Banks investment arm.

Deutsche Banks asset management had only integrated with Londons

investment group Morgan Grenfell and the American Bankers trust. This

division alone contributed over 60% of Deutsche Banks profit. The top

people at the asset management were not ready to undertake a new

process of integration with Kleinwort Benson. So there was only one

option left with the Dresdner Bank i.e. to sell Kleinwort Benson

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completely. However Walter, the chairman of the Dresdner Bank was not

prepared for this. This led to the withdrawal of the Dresdner Bank from

the merger negotiations.

In economic and political circles, the planned merger was celebrated as

Germanys advance into the premier league of the international financial

markets. But the failure of the merger led to the disaster of Germany as

the financial center.

References:

Bibliography:

i. Chandra, P.C., 2006, Financial Management, Tata McGraw-hill

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Webliography:

i. http://www.arcelormittal.com/index.php?lang=en&page=539

ii. http://law.jrank.org/pages/8550/Mergers-Acquisitions.html

iii. http://law.jrank.org/pages/8543/Mergers-Acquisitions-Types-

Mergers.html

iv. http://law.jrank.org/pages/8545/Mergers-Acquisitions-Competitive-Concerns.html

v. http://law.jrank.org/pages/8544/Mergers-Acquisitions-Corporate-Merger-

Procedures.html

vi. http://www.learnmergers.com/mergers-types.shtml

vii. http://www.learnmergers.com/mergers-mergers.shtml

viii. http://en.wikipedia.org/wiki/Mergers_and_acquisitions

ix. http://en.wikipedia.org/wiki/Due_diligence

x. http://www.investopedia.com/ask/answers/06/m&areasons.asp

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